When it comes to ECB purchases, we believe the consensus is a ‘lower for longer scenario’ – lower asset purchases than initially anticipated, yet over a longer time period than expected. However, investors seem to be seeing through the details of how tapering is going to be delivered and focusing more on the total amount of further purchases, which is currently expected to be in the range of €200bn to €220bn, or perhaps a touch more. The rationale for this narrative is to anchor expectations for no interest rate hikes until well into the future, but still withdraw monetary stimulus. In other words, it is a way of tightening monetary policy, while limiting the impact on the euro.
If Draghi was to step back from this and deliver less tapering than anticipated, the euro would clearly take an initial hit, but we would not expect a more pronounced move. One has to bear in mind that a significant part of the appreciation of the euro this year is due to the dissipation of political risks and the positive economic backdrop in the eurozone. Mario Draghi has, at least since the Sintra meeting in June, adopted a fairly neutral narrative. This has not stopped the euro from appreciating further, despite increasing voices suggesting that further currency strength would limit the capacity for the ECB to taper.
The bigger risk for euro weakness actually lies on the other side of the exchange rate, in particular when it comes to the US dollar. The Fed has already surprised markets with a somewhat more hawkish stance. Moreover, the appointment of a new Fed Governor and the prospect of potential tax reform could be dollar-positive events. Considering this, we do think there is potential for Draghi to be marginally more hawkish than the consensus would expect. Mario Draghi is undoubtedly the most gifted central banker of our time, he has a profound capacity to analyse the psyche of the market. We believe he also has a clear understanding of what he can ‘get away with’ with regards to tapering.
Hartwig Kos is co-head of multi-asset & vice-CIO at SYZ Asset Management