The ECB left policy unchanged in October but, arguably, President Mario
Draghi delivered the maximum level of dovishness at the press
conference, notes BNP Paribas.
"Specifically, he said that the degree of policy accommodation will be
re-examined in December and that all policy instruments are being
considered, including a further cut in the deposit rate. He also said
the ECB is "vigilant" on inflation - a key word that in the past has
been used to indicate imminent action.
The bottom line is that the December meeting now appears more a
question of 'how', rather than 'whether', the ECB will ease policy
further," BNPP argues.
For the outlook for the EUR, BNPP notes that the
mention of the possibility of a further cut in the deposit rate was
important as this is the policy tool that would probably have the most
direct impact on eurozone front-end rates (euro 2y swap collapsed to
-0.5bp today).
"However, we would also highlight the role of asset purchases for real
rates, which Mr Draghi mentioned specifically once again. A key driver
of EUR weakness early this year was a consistent rise in inflation
expectations which drove real rates further into negative territory and
led to portfolio capital outflows. If these dynamics are restored, the
EUR should return to a weakening path," BNPP argues.
How to play it?
BNPP went into the ECB meeting with short EURUSD and EURGBP,
and now thinks that positioning has become much more supportive for the
rebuilding of EUR shorts.
"According to BNP Paribas positioning analysis, EUR shorts were largely
unwound in Q2-Q3 and EUR positioning has turned the most bullish since
2013. After today's ECB meeting the market is likely to be biased to rebuild short positions, selling into any EUR rallies," BNPP projects.
Consequently BNPP maintains its EUR/USD short from 1.1450
targeting 1.09 and EUR/GBP short from 0.7395 targeting 0.70. BNPP
trailed the stops today on EUR/USD to 1.1360, and on EUR/GBP to 0.7325.
