An announcement on QE in the euro-zone seems imminent in the euro-zone. The shocking move by the SNB with its accompanying hints and recent comments from ECB officials have paved the way for a very significant announcement. The reaction for EUR/USD depends on the size of the program. But, Draghi and co. will not necessarily give us an exact total number, but could go for other options such a program without a time frame, choosing a percentage of national debt as a measure, etc.
Here are 7 potential scenarios for the January 22nd event, with probabilities and possible reactions in EUR/USD:
- QE worth around €750 billion: This would fit nicely between €500 billion reportedly prepared and the big T word: €1 trillion euros. Counting the other tools such as the TLTRO and ABS, a QE program of this size would make the total balance sheet expansion reach around €1 trillion, as the Bank intended. In this scenario, the euro would slide, but not collapse. Probability: high.
- QE worth €500 billion: This is what the ECB staff was originally preparing, according to reports, but since then it seems that the move would be larger. Such a move is basically priced into EUR/USD and the reaction would be a “sell the fact”. Probability: medium.
- QE worth €1 trillion or more: It could a a program of “up to one trillion” and not necessarily reach this sum, but the effect would be strong enough and would send the euro free-falling. Probability: low.
- QE of up to 25% of total debt, by NCBs, with opt-outs: This is certainly a valid option according to what Knot had to say and it implies even €2 trillion. However, if bond buying is done at the national levels, with the National Central Banks (NCBs) rather than the ECB and countries could opt out, Germany would certainly a candidate that could avoid participation, taking a lot of weight out of the program. This could trigger a mixed reaction and lots of confusion in markets but hurt the euro. Probability: medium-high.
- QE of up to 25% total debt, managed by the ECB: In this scenario, the ECB manages all the bond buying, and does it relatively quickly, printing lots of euros and steering fast towards the 2012 balance sheet. This would send the euro plunging fast. Probability: medium-low, due to German opposition.
- No QE now: Some are still expecting the ECB to only talk about acting in March but not do anything now. Given recent hints, the probability seems very low. If this is the case, the euro would jump, as avoiding action now could mean avoiding action later.
- Unlimited time frame: If Draghi takes a page from the last Fed book, he would announce monthly bond buying and no time frame for ending it or tapering it down. An unlimited program is the strongest one, and parity for EUR/USD is an option for the next days, depending on the monthly quantity. However, the probability is low: the ECB does adopt other banks’ policies, but usually not the latest ones and not the most extreme ones.
We are assuming that the ECB will not go for buys of corporate bonds, an option that was raised in the past but could be kept as a possible “Phase II” – keeping ammunition in the tool shed.
What do you think? Want more opinions:
ECB decision – all the articles towards Draghi Day
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