Today, the European Central Bank left interest rates on hold at 0.75% as expected. The EURUSD rallied 30pts from 1.2620 to 1.2650. During the beginning of the press conference, he didn’t indicate an immediate start of official bond purchases for sovereigns. The EURUSD dropped from 1.2650 to 1.2587. Here are the key portions for the new program called the Outright Monetary Transactions:
1. Sterilized.
2. Holdings published on a weekly basis.
3. Breakdown between countries announced on a monthly basis.
4. Buy 1-3 years w/no quantitative limit on size of buys.
5. Purchases conducted under conditionality from EFSF/ESM.
Most of these points were released yesterday and therefore it should not be a surprise that the FX market is underwhelmed by the announcement.
Given that the old bond buying program (SMP) and the new program (OMT) will be sterilized, there is no monetary stimulus to aid the economy except for the improvement in monetary transmission. This underscores the point that the ECB is only/solely dealing with European bond yields and not addressing economic growth by increasing monetary stimulus. This should mean that European monetary conditions won’t improve significantly. This means no improvement to growth. The ECB falls short of truly aiding Europe.
