The size of the ECB’s ABS program could be limited by the market itself. In order for the plan to succeed, the ECB would need to convince banks to securitize their loans, says Simon Smith of FxPRo.
In the interview below, Smith also discuses the uncertainty regarding Scottish independence and its weight on the pound, the already not-necessarily-positive aspects of a weaker yen on the Japanese economy and more.
Simon has over seventeen years experience of macro forecasting and investment strategy research. Prior to joining FxPro in May 2010, Simon was a consultant with Thomson Reuters, having spent four years as Chief Economist at Weavering Capital. He has held economic and strategy positions with Standard & Poor’s, together with consultancy firms 4Cast and MMS International. Simon holds an MSc. in Economics from the University of London and a BSc. from Brunel University.
- The change in Scottish referendum polls hits the pound and some UK stocks. Do you think that opinion polls are set to dominate GBP trading until September 18th?
I think sterling is going to retain the current weakness unless we get to a point where the polls are more decisive one way or the other, because at the moment it is the uncertainty that is hitting both the spot and options markets. Clearly if polls move more towards the Yes camp then we will see more weakness in sterling. There are just too many aspects of the ‘yes’ campaign that have not been properly explained or thought out and this is causing uncertainty in markets, especially in relation to the currency and debt burden.
- Draghi hit the euro hard with the cuts and the ABS announcement. However, he didn’t say what size it will take. When we get more details in October, is there a chance the Draghi will disappoint with the ABS details and send the euro back up? What would be a “sizable” enough ABS program to convince markets?
The size is limited by the amount of securities available. In the early part of the financial crisis, the US Fed started by buying mortgage backed securities. It was an easy win, because it is such a huge market in the US. In the Eurozone, the asset-backed market is a lot smaller, firms being generally more reliant on the banking sector for finance. As such, the ECB is limited by both the size of the market and also the speed at which it can persuade banks to move lending into a securitised form. The current market size is around 100bln EUR, against a total ECB balance sheet of EUR 2trn. So even if the ECB were to buy the entire market overnight, it would not represent a significant proportion of their balance sheet. They need to increase the size of the market as well and that depends on the appetite of banks to securitise their loan books along the lines the ECB would like.
- US Non-Farm Payrolls disappointed. Can it have an effect on the FOMC decision later next week, or can the central bank see it as a one-time drop for now?
I don’t think it’s sufficient to move the Fed from their prescribed course of tapering. Previous comments have suggested that the hurdle is pretty high in terms of shifting the Fed from its current steady course of tapering by USD 10 bln every meeting. Yes, headline payrolls were weaker, but the longer-term averages (6 & 12 month) are still holding above 200k, which is where the Fed want to see them maintained.
- Japan’s final Q2 GDP came out worse than the initial read. Is a case building for more stimulus from the BOJ? Or can the recent weakness of the yen do the job?
I’m not sure we are there yet, but we are going along that path. There was considerable volatility around the GDP numbers in the first half of the year, given the much trailed consumption tax increase. Overall, I can’t get excited by the prospect of further yen weakness providing some support to the economy, as it has only delivered limited benefit in the past now that Japan has moved much of its production overseas and it more reliant on energy imports.
- The Australian dollar has shown a lot of strength lately. However, the price of iron ore remains depressed. Is it a bearish sign for the Aussie?
The relationship between the Aussie and commodity prices has been breaking down for 2 years now, so things are not as simple as they once were. This is also why many Aussie bears on the back of the commodity story have had their fingers burnt. The Aussie is going to be pressured for different reasons, more down to the behaviour of the domestic economy and the fact that the central bank still prefers to see the currency lower.
Here is the previous interview with Smith: QE seems imminent in the euro-zone; BOE could raise rates in November
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