Draghi Is No Knight in Shining Armor for Bullish Euro Traders

(Bloomberg) -- Currency and bond investors learned little new from the European Central Bank’s latest pronouncements, which seemed to cement the impression that policy makers are in no hurry to prepare the markets for higher borrowing costs.

President Mario Draghi said that English was the only language that accurately captures the nuances of the ECB’s communication on when the deposit rate may be raised -- not until at least through the summer of 2019. The euro dropped against the dollar and bunds erased earlier losses.

While Draghi expressed greater confidence over inflation, questions remain over when the central bank will announce plans on reinvesting the proceeds from maturing bonds.

Draghi Is No Knight in Shining Armor for Bullish Euro Traders

Here’s what analysts said about the key themes from the ECB meeting:

English Only, Please

The ECB added a disclaimer to Thursday’s announcement making it clear that the exact wording agreed by the Governing Council should “be taken from the English version.” Draghi himself said: “We conduct our Governing Council in English and agree on an English text so that’s what we have to look at.”

  • “Draghi’s comments on the rate guidance sent the euro a bit lower, with the President quashing any speculations about an earlier hike by the ECB,” writes Credit Agricole strategist Valentin Marinov
    • “The bank may offer more clarity on the structure of its reinvestment strategy closer to the end of QE -- i.e., in September or in Q4”
  • “One of the minor EUR negatives is Draghi’s reference that markets are tightly aligned to the ECB’s rate guidance,” says ING strategist Viraj Patel
  • “They’re not acting for the core of the European economy, they’re acting for the periphery,” Voya Investment Management money manager Matt Toms tells BTV.
    • “It’s a tailwind to peripheral spreads for the next six months”

No Reinvestment Talk

Draghi said there had been no discussion about the ECB’s reinvestment policy, reiterating that the capital key remains the anchor dictating purchases. Any “operation twist” would favor semi-core and peripheral countries -- such as France and Italy -- with purchases in Germany already running close to the 33 percent cap.

  • This “could take the edge out of spreads fueled by speculation that the ECB will deviate from cap key in reinvestment phase,” says Commerzbank strategist Christoph Rieger
  • “They do not have much leeway in some jurisdictions (Germany, Netherlands) and I think the market impact would be overall limited to a curve flattening,” says Mizuho International strategist Antoine Bouvet

Inflation Confidence

Draghi reaffirmed confidence euro-area in inflation, despite risks stemming from growing protectionism. The euro climbed as after he said that domestic cost pressures are “strengthening” and “broadening,” and that “uncertainty around the inflation outlook is receding.”

  • “The economic upswing in the euro zone is still continuing solidly, but by the end of 2019, prospects are likely to wane,” says Sintje Boie, a senior economist at HSH Nordbank AG
    • Still, “the speculation about a first rate hike is likely to increase and challenge the communication of the central bank”

No Euro Worries

Draghi noted that the euro had appreciated “considerably” over the past 12 to 18 months, while stating that the exchange rate isn’t a policy target.

  • “Investors may be gradually running out of reasons to sell the EUR,” says strategist Valentin Marinov
    • “This may suggest that a period of consolidation may lie ahead for EUR/USD”

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