We have less than four months left before the ECB asset purchase program ends, and the president of the ECB, Mario Draghi is still reticent about the future path of the monetary policy. Month after month, the tapering process has been delayed while the recovery in the Eurozone has strengthened.
If you think that the ECB is running out of bonds to purchase, then certainly it will be helpful to remember that the ECB could always increase those limits which are constraining them. The bank can always add more products to their purchase basket. This is the last thing which the bank is concerned about. The bank would have sufficient excuses if it wants to keep delaying the tightening process of the monetary policy. But, the fact is that the patient is not sick and there is no need for the lifeline. It will not be far stretched to say that the ECB is in a cat and mouse chase game. Not only investors but also some officials of the European Central Bank are concerned about the currency’s strength. On 07th of September, the Euro has touched the high of 1.2092 against the dollar and its strength against the Sterling is even more remarkable.
Draghi certainly has the ability to punch above his weight and we know that very well. The policy maker did make a reference to the currency’s volatility and exchange rate in a recent press conference. The Euro dollar algos went bananas as Draghi started to speak despite the fact that the president was reluctant to spell out the month, date and the pace of the tapering process. The ECB simply wants to keep a more cautious approach to avoid any catastrophe.
We also think that when the bank will start the process of tapering, it would not be aggressive. Instead, the most amount of reduction could be €30bln and then gradually reduce the figure from their onwards. The Euro-dollar one weak risk reversal- which is nothing more than a clear picture of investors being bullish or bearish shows that traders do think that the path of least resistance is skewed to the upside. It is likely that we could move towards the 1.23 mark or beyond by the end of Q3.