Today we learned that the bears must have been much naughtier than they had thought, as all they found this morning was two particularly small and unimpressive lumps of coal in the bottom of their stockings.
After a bit of a fiasco where the Financial Times errantly “leaked” that the European Central Bank was leaving its deposit rate unchanged, we learned that the central bank would in fact be cutting the deposit rate by a less-than-expected 10bps to -0.3%. Ironically, traders who bought EUR/USD on the false leak actually benefited, because the halfhearted deposit rate cut still led to a bounce in EUR/USD.
As we noted yesterday, the deposit rate cut widens the universe of assets that the ECB can buy under its QE program, but not by nearly as much as a 20bps or larger cut would have. Despite this disappointment, EUR/USD bears still hoped that Draghi could deliver a big surprise at its upcoming press conference.
Alas, these hopes were quickly dashed as Draghi did the bare minimum to retain the ECB’s credibility, falling well short of taking the sort of bold action that traders had expected. The central bank did opt to extend its ongoing quantitative easing (QE) program by six months until “at least” March 2017 and broadened the assets available for purchase to include regional debt, but these actions had already been discounted by the market. The “big bazooka” of expanding the monthly QE purchases by say €20B a month was nowhere to be found, leading to a panicked stampede out of the crowded short euro and long Eurozone fixed income trades.
While today’s developments seem apocalyptic for many traders, it is worth noting that Europe’s economy is not necessarily on the type of life support that would have necessitated an everything-but-the-kitchen-