The European Central Bank did something a little different Tuesday that has analysts wondering if policy makers there are a little more open to something like the quantitative easing measures that other central banks – namely in the U.S. and U.K. – have been implementing to support their economies.
The ECB, of course, has a little different problem: it has to set policy for 17 economies, some of which are having an increasingly hard time managing their own debt loads.
Basically, the ECB said Tuesday it didn’t fully offset all its weekly government-bond purchases with its tender operation, leaving billions of extra euros in the financial system. The euro briefly turned negative after the release. While that’s happened a few times before, “it is noteworthy however that this is the first time this has happened since purchases were expanded to include Italy and Spain,” said Richard Franulovich, chief currency strategist at Westpac. “This could be just a ‘curiosity’ but it could also be read in a more ominous fashion.”
It could simply be that banks preferred to keep their funds for liquidity instead of depositing them at the ECB for the week, he wrote in a note.
“We are approaching a critical juncture if this happens again. If the ECB remains committed to full sterilization, they must contemplate cutting back on the size of their bond purchases. If not, the ECB has effectively commenced quantitative easing.” “If instead we find out next week the ECB has curtailed its bond purchases, that would be a sign the ECB remains opposed to quantitative easing and is willing to sacrifice stability in PIIG bond markets in order to adhere to its puritan philosophy,” Franulovich said, referring to Portugal, Italy, Ireland, Greece and Spain.
That would be really negative for the euro and the bonds of those countries.
“Alternatively, another week of decent ECB bond purchases would be a relief. The question then is whether they are fully sterilized or not. If so, it’s business as usual,” he said. “If on the other hand the ECB data shows another week of decent bond purchases and it is not fully sterilized that would amount to a significant policy shift by the ECB.” That would be positive for risk assets and a negative for the euro EURUSD.
