Date: 11 Oct 2017
Traders will recall that the European Central Bank (ECB) has previously said that when it meets on October 26, it will likely provide some greater clarity on how it sees its quantitative easing (QE) programme progressing beyond the end of this year. Traders will have their own opinions on what the ECB might do and how that might affect the euro but may find it of interest to be aware of a number of scenarios suggested by Dutch bank ABN Amro yesterday. ABN Amro’s base case “is that QE will be extended next year, but at a slower pace” with “the size of monthly asset purchases to drop to EUR 30bn from January onwards, with the programme extended through to September 2018.” Under its base case ABN Amro foresees the ECB removing monetary accommodation very slowly, leaving open the prospect of re-sizing QE if necessary and with the ECB stressing that euro zone interest rates remain unchanged until after the QE programme ends. In this scenario the Dutch bank expects there might be some accompanying euro strength but nowhere near as much as ABN Amro expects would occur under a second scenario where the Dutch bank envisages the ECB opting for a “real taper with a communicated QE” in which “the ECB would set out a slowdown in net purchases and specify a specific end date.”
Then there’s ABN Amro’s third scenario, which they characterise as their least likely outcome, where the “ECB announced open-ended QE with no pre-set guidance. For instance, it could say that net asset purchases would total EUR 40bn per month until there is a clear upward trend in underlying inflationary pressures.” In this case the Dutch bank expects such a policy “would have a powerful impact on expectations both about future QE and on the period in which interest rates would remain low” and be accompanied by euro weakness. Three scenarios, three sets of possible. Three ideas that traders might wish to bear in mind as the calendar moves towards October 26.
Written by Neal Kimberley, External Currency Analyst.