Yesterday, I posted this trade idea: long $HYG on further Q€/ECB easing expectations from Draghi, as an alternative/complementary Euro short.
My seemingly-unending Euro short thesis is very simple: The ECB must expand QE and/or further ease monetary policy. We’ve seen:
- Decelerating economic data, led by Germany
- Abysmal and worsening inflation expectations
- Persistently stronger Euro (ECB is VERY keen to see a weaker Euro. After all, they sold Germany on QE b/c of Euro strength)
- Tuesday’s EuroZone bank lending surveys showed both loan demand and credit standards are reversing
This morning we received a bit more than I expected and I believe more than the market expected. As of this moment, EUR/USD is trading at 1.1169, just below its 100 day MA. I see further immediate downside.
The major takeaways from today’s press conference:
- The ECB’s new motto: “work and assess, not wait and see” should be read as: “we will be easing further, the degree will be determined by how much the Euro falls.”
- Everyone knows sub/near 2% EZ inflation targets are NOT achievable, so let’s also watch unemployment and output growth, because ‘hey, the Fed has a dual mandate and those metrics are abysmal too.’
- Concerned that the ECB will never stop buying bonds? Have no fear, Vítor Constâncio says SNB balance sheet is 3.66x GDP so the ECB w/ only 1.07x has plenty of room to expand until that becomes a reasonable question to ask.
- The fact that Draghi teed Constâncio up speaks to the broader agreement of the council that there’s plenty of room to continue to grow assets.
- Interesting that there was no discussion of further expanding the maximum ownership limits on securities the ECB can buy. I was quite confident that would be a “jawboning” talking point. Unimportant, though.
- Deposit rate cuts were firmly placed on the table and not as “one among many alternatives”. Draghi had multiple opportunities to walk this back and if anything, he focused more light on the possibility of cuts. This was certainly more dovish than expected.
- Lastly, “a few [members] hinted at acting today.” Sounded like a gimmick, but it reinforces the message Draghi intended to communicate this morning: ‘the ECB will ease further and we’re not kidding around.’
All in all, the message didn’t measure up to his bazooka comments, but they were certainly more dovish than expected.
As far as the $HYG long goes, we’ll need a bit more time to see how credit markets digest lower Bund yields, but one thing is certain: we’re back to a world where it’s easy to short the Euro!