European shares were at a seven-year high and the euro sat near an 11-year low on Thursday as the European Central Bank prepared to take the plunge into full-scale quantitative easing.
Market expectations are sky-high for the ECB to unveil a large-scale QE programme — printing money to buy euro zone government bonds — despite opposition from Germany’s Bundesbank. Berlin is also worried that such purchases could allow spendthrift countries to slacken the pace of reforms.
A euro zone source said on Wednesday that the bank’s Executive Board, which met on Tuesday, has proposed the ECB should buy €50 billion ($58 billion) of bonds each month from March, though it was unclear how long for.
Markets pumped up by almost a year of jockeying over the issue were awaiting the crucial details, expected to come at a 1330 GMT news conference with the bank’s chief Mario Draghi.
German and other euro zone bond yields nudged up as investors locked in some profits from a recent sharp rally, while the region’s shares and the euro traded sideways at 1,433.60 points and just over $1.16 respectively.
“The key market focus is likely to be on two things,’’ said analysts at Goldman Sachs. “(i) the scale and maturity profile of the programme and (ii) whether the ECB chooses to ‘mutualise’ the risk on its own balance sheet or place assets on national central banks' balance sheets.’’
Broader market sentiment remained positive for riskier assets, supported by the aggressive actions of central banks seeking to fight deflation. For European shares, it was a sixth day of rises and for MSCI’s world index a fifth.
Bank of Canada rate cut
Canada’s dollar hit a six-year low after it became the latest country to surprise by cutting rates on Wednesday, while there was chatter that countries like Denmark may opt to move again if the ECB announces a big QE programme.
The ECB has already cut interest rates to record lows, begun buying private sector assets and funnelled hundreds of billions of euros of cheap loans to banks, in the hope that they would lend the money on into the economy and stimulate growth.
Now its last remaining major option is QE, a policy that the US Federal Reserve, Bank of England and Bank of Japan have all used with some success.
Euro vs dollar
The euro traded narrowly, between $1.1629 and $1.1589, moving away from an 11-year nadir of $1.14595 plumbed last week as the market trimmed short positions ahead of the ECB meeting.
Market analysts reckoned there was limited room for it to fall for now, given how high and for how long currency traders had been preparing for the ECB to take the plunge into bond buying stimulus. Banks like Goldman, however, are expecting it to eventually reach parity with the dollar.
The Australian and New Zealand dollars suffered deep losses as Canada’s shock rate cut fuelled speculation the Reserve Bank of Australia could soon follow suit.
The Aussie fetched $0.8069, having shed more than 1 per cent overnight. It was pulling closer to a six-year trough of $0.8033 set earlier in the month, while the kiwi tumbled to a 2-1/2 year low of $0.7516.
Crude oil, gold
Crude oil prices and gold also dipped on expectations that the ECB’s decision to launch bond-buying stimulus could boost the dollar and put downward pressure on the commodity.
Brent crude futures were trading at $49 per barrel and US crude was down 38 cents at $47.40 a barrel in early European trading.
The dollar meanwhile dipped against a basket of currencies and to 117.75 on the yen as Japan’s central bank signalled its resolve to achieve its ambitious 2 per cent inflation target.