ECB to Buy at Least €1.1 Trillion of Bonds, Justifying the SNB Decision Last Thursday

Mario Draghi has taken out the bazooka once more, over-delivering on market expectations massively and prompting liquidation of EUR/USD longs

Mario Draghi, President of the ECB
Mario Draghi, President of the ECB

The President of the ECB, Mario Draghi, has stated at his press conference that the ECB is embarking on a quantitative easing program, buying sovereign bonds from a number of European countries with special treatment for those under rescue programs from the IMF and the European Stability Mechanism.

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A slew of frustrated reactions from Germany have already started flocking the market. The German Banking Association stated that the move will have “marginal” effects on growth and prices, while at the same time it was increasing the risks of bubbles formation.

Bond markets across the European spectrum have rallied sharply in the aftermath of the ECB announcement with 10-year yields in France dropping below 1.5%, while Italy’s costs have decreased to below 3% for the first time in history.

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While Mr. Draghi himself said that some of the decisions have already been priced into the market, he reiterated that the central bank had to show credibility with its actions.

SNB Decision Justified

The Swiss National Bank’s decision from last week suddenly makes a lot of sense. Should the Swiss Bank remain in the ‘trade’ of buying euros it would have to commit its balance sheet into buying a currency which the European Central Bank is vigorously trying to devalue as much as it can.

There is a wide range of speculation that ECB’s President Mario Draghi and SNB’s Chairman Thomas Jordan had discussed the incoming ECB decision before the Swiss franc floor was scrapped last Thursday, causing massive losses to traders who had been building up long positions for the past several months, relying on the Swiss franc peg.

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