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Draghi Coy on ABS Details

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The ECB disappointed most market participants last night, causing some increased volatility in Forex markets without creating much strong direction; stock markets reacted negatively with an emphasis on peripheral Europe, with most markets down around 1-3%. Draghi did not disappoint in the size of the ABS program, but rather in skirting around actually revealing any firm figures on the stimulus measures. During the Q & A session Draghi chose to avoid answering direct questions about the amount the ECB would purchase, directing listeners to the press release sent out after the press conference. From the statement:

Programmes will last at least two years

Will enhance transmission of monetary policy, support provision of credit to the euro area economy and, as a result, provide further monetary policy accommodation

Eurosystem collateral framework is guiding principle for eligibility of assets for purchase

Asset purchases to start in fourth quarter 2014, starting with covered bonds in second-half of October

The announcement fell short of announcing specific details, as well as extending the program to 2 years which indicates the rate of purchases may be slower than expected. However, without firm details the announcement left analysts to pick over the details that were announced to try and gauge the scale, such as what would be included under the ‘simple and transparent’ securities:

“The third point is that we want to be as inclusive as possible. But with prudence, so that we have decided to include countries that have a rating below BBB-, like Greece and Cyprus, applying certain derogations, with two caveats. The first is that there is a series of measures that mitigate risk for the specific purchases that are to happen there, so that the assets bought there would be risk-equivalent to assets bought elsewhere, so for example, size-wise, type-wise. Then there is a second, I would say, caveat or prudence which is basically that the countries ought to have an ongoing programme with the EU. I think I gave you the broad lines of what we have decided really. Then the rest will be clearer in the press communiqué.”

The ECB also chose not to act again on interest rates after last month’s surprise cut, with Draghi signalling several times that they had reached the lower bound for interest rate, but also indicating strongly that the bank would be willing to act with further unconventional policies if it was required. The Euro oscillated within 75 pip band during the announcements, reaching as high as 1.2700.

With the ECB meeting out of the way, focus will fall on tonight’s Non-Farm Payrolls figure due from the US. Economists expect a number of approximately 216,000 – up from last month’s 146,000 – with the Unemployment Rate expected to remain at 6.1%. The US Trade Balance is forecast to come in near to last month’s number at a deficit of 41 Billion. The US dollar has firmed recently on diverging monetary policy and improving data coming out of the US, however popular trades such as long USDJPY have reversed this week – falling 200 pips.

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