ECB Risks

September 8, 2016

An ECB meeting is never a time to be complacent, but that’s the impression from markets at present. If you look at the average true range of EURUSD (2 week simple) has been languishing near the lows of the year over the recent week at around 0.75 cents. Measures of implied volatility in both equities and FX are also near to the lows of the year. The CVIX (Deutsche Bank) measures of implied (future) FX volatility is currently only just above the early August lows. All that said, the ECB President has a habit of dropping in the odd verbal bomb, just when you think it’s the most boring policy meeting and press conference ever.

For that reason, it’s worth staying awake during today’s proceedings. The fact is that the ECB is running out of options at this point in time. Rates are effectively below zero, the universe of bonds available for them to buy is rapidly diminishing and other lending schemes designed to support the corporate sector have met with limited success. At such points in time, Draghi does have a habit of thinking words are more powerful than actions. All that said, markets are becoming less believing of central banks who are rapidly running out of rope.

Overnight, we’ve seen the yen modestly firmer on the back of the final GDP numbers for Q2, which saw the quarterly growth number revised up from flat to 0.2% QoQ. Hardly anything to shout about, hence the limited reaction on the currency. Elsewhere, EURGBP has held onto the recent reversal, forming a base just above the 0.83 level. BoE Governor Carney yesterday robustly defended the BoE’s decisions and communication in the wake of the Brexit vote and kept the door open for more policy easing if needed.

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