Trader Talk

ECB hawks win, and Janet Yellen should be happy

Pisani: US dollar moves lower after ECB disappoints

Hawks on the European Central Bank committee won a battle on Thursday, and the euro is screaming higher.

The ECB, which began its bond purchasing program in March 2015, will extend its bond buying program to March 2017 (and possibly beyond) from September 2016. The central bank will also include the debt of regional and local governments, or muni debt, in purchases.

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Though the ECB will reinvest the principal payments of the securities purchased, it is not increasing the amount of monthly purchases beyond the money that is being reinvested.

And that was the problem. The markets, expecting ECB President Mario Draghi to continue his "whatever it takes" stand, believed the ECB would expand the amount of monthly purchases. Accordingly, much of the trading community was long the dollar, short the euro.

A clerk handles dollars and euros at a money exchange office in Paris.
Euro tops $1.09 after ECB decision, Draghi comments
President of the European Central Bank Mario Draghi
ECB to extend QE until at least March 2017, buy regional government bonds

That crowded trade got unwound a bit this morning.

Why didn't the ECB up the amount of monthly purchases? One partial explanation is central bankers were running out of assets they could buy, as evidenced by the fact that they decided to begin buying muni debt.

But the bigger reason is that they were clearly getting push back from the hawks on the committee (mainly Jens Weidmann, president of the Bundesbank), who were opposed to expanding the ECB's balance sheet.

Is there any good news? Well, the weaker dollar certainly makes it easier for the Fed Reserve to hike interest rates. There's an (inadvertent) early Valentine from Mario Draghi to Fed Chair Janet Yellen.

And with a weaker dollar, look for a modest bounce in oil and gold.