The ECB’s Monetary Policy Divergence
We enter 2015 on the heels of pivots made by several of the major central banks: the Bank of England and the Federal Reserve are discussing rate liftoff timing; while the Bank of Japan, the European Central Bank, and the Swiss National Bank are all pushing for more aggressive easing measures.
This time is different, however. In years past, promises of pending stimulus had put a halt on the declines seen by the Euro at times (notably in July 2012 when ECB President Draghi made his now (in)famous “whatever it takes” comment), but the nature of the current decline in the Euro is different than those previously – context is important.
Now that peripheral sovereign bond yields are already low, so there is no latent ‘risk-relief rally’ potential. Coupled with plunging inflation expectations, by the end of 2014, the ECB was laying the ground work for a potentially massive balance sheet expansion in 2015. The oft-cited figure, a return to the early-2012 levels, would call for the ECB’s balance sheet to balloon by €500 billion to €1 trillion (current size is roughly €2.05 trillion; range for early-2012 was roughly €2.60 to €3.10 trillion).
If a wave of stimulus is about to come crashing down on the shores of the Euro-Zone, then the technical structures of two pairs stuck in the ECB’s policy divergence vacuum – EURGBP and EURUSD – could see significantly lower prices over the next 12-months.
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