Euro below $1.10 Amid Dovish European Central Bank President

The European Central Bank's bond buying program kicks off in 4 days, but the markets are already questioning its effectiveness,

Mario Draghi ECB Press Conference
Mario Draghi at ECB Press Conference in Cyprus, Photo: European Central Bank

It is rare that we see a major currency move 20% in a matter of months. However, since May 2014, the euro has done just that against the U.S. dollar. Today, the single European currency hit a new low, trading below the 1.10 figure for the first time since September 2013.

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A big milestone no doubt and testament to the changes to which the European Central Bank has committed in the past half a year, bearing in mind that in May 2014 the EUR/USD exchange rate hit 1.3997.

Forex Magnates reported back in June 2014 about the intentions of the governing council of the European Central Bank (ECB) to do all it could to weaken the euro, but we didn’t expect its lengthy undertaking. The lack of sufficient structural reforms in Southern Europe prompted the ECB to act in a timely manner to stem euro strength and relieve local producers from additional pressure.

The Bond Buying Program Conditions

According to an announcement published on ECB’s website, the central bank will be buying bonds to the tune of €60 billion in a month from next Monday under preset conditions. This was widely expected, as the old adagio goes, “the devil is in the details”.

The monthly figure of bond purchases will include both public and private sector debt. The ECB called its scheme, including government issues, Public Sector Purchase Programme (PSPP). It includes debt securities issued by Euro Area governments, certain agencies and a number of international or supranational institutions.

The design of the program is such that it implies a gradual implementation in order to avoid substantial interference in the price formation of securities markets. The ECB also said that it would be purchasing negative yield instruments as long as the yield was above the central bank’s deposit facility rate.

The announcement sent European debt yields lower across the board with Spain’s 10-year trading at 1.28%, Italy’s at 1.31%, while Germany’s fell to 0.35%.

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If the purchasable volume of marketable debt instruments issued by the central government and agencies is insufficient in the respective jurisdiction to accommodate the corresponding share of purchases under the ECB’s capital key, substitute purchases are foreseen.

ECB Credited Greece with a Total of €100 Billion Euros

Asked during the Q&A session about the ECB’s plans in restoring the eligibility of Greek government bonds as collateral for loans from the central bank, and how the central bank expected to help Greece, Mario Draghi dropped some hot numbers on the table.

Greece Euro Zone Flags
Photo: Bloomberg

He explained that the ECB has already lent €100 billion euros to Greece, totaling 68% of the country’s GDP. The president of the central bank further reiterated that this was the highest proportion in any country in the Euro Zone.

The ECB would not be purchasing Greek bonds for the time being, as the country has already hit the 33% issuer limit and the country’s paper is rated below investment grade all the while the current review by the Troika is still pending.

Analyst Views

Following the ECB’s announcements and press conference a number of analysts voiced their opinion about the effectiveness of the European quantitative easing scheme.

Capital Economics research stated, “We doubt that the Bank’s quantitative easing programme will prompt a meaningful economic recovery or eradicate the threat of deflation.”

Mr. Draghi left the option of buying more assets from late 2016 on the table and voiced the opinion of the governing council that it didn’t intend to deviate from its current bond purchasing plans under any circumstances.

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