September 6 2012

In the broadcast today: What’s Next for the EUR after the ECB Decision? In the aftermath of the European Central Bank’s monetary policy decision and the outlined details of its program to buy bonds, we examine what the future might have in store for the EUR and ponder the next move of the single currency, we analyze the test of an important resistance area for the EUR/USD currency pair, we take a look at the bullish breakout attempt of the GBP/USD pair, we note the strengthening of the USD vs. JPY, we highlight the market’s reaction to the Bank of England and the European Central Bank interest rate announcements, the Euro-zone GDP, the U.S. Jobless Claims and ADP Employment report, we discuss new forecasts from Bank of New York-Mellon and Deutsche Bank, and prepare for the trading session ahead.

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ECB Mario Draghi announced the details of the central bank’s bond-buying program. ‘Almost unanimous’ vote overrides German fear of inflation. Countries benefiting must enter bailout programs. Eurozone growth forecast downgraded…



Powered by Guardian.co.ukThis article titled “Eurozone crisis: ECB introduces unlimited bond-buying programme” was written by Josephine Moulds, for guardian.co.uk on Thursday 6th September 2012 13.48 UTC

Mario Draghi, the president of the European Central Bank, has pushed through a controversial scheme to save the euro, trampling over German opposition.

At the same time, the ECB said that the economic outlook for the eurozone had deteriorated. It now expects the eurozone economy to shrink by 0.4% in 2012 and grow by 0.5% in 2013, while inflation rises to 2.6%.

Draghi said the vote to start buying the bonds of crisis-hit states in unlimited amounts, in an attempt to bring governments’ borrowing costs down, was “almost unanimous”, with one exception.

The scheme has faced furious opposition from German central bank chief Jens Weidmann, who argues that it is tantamount to printing money in order to pay off a country’s debt, which is expressly forbidden by the ECB’s mandate. He also fears the measures will fuel inflation, ease the pressure on overspending governments to get their finances in order and erode the ECB’s independence.

Ranvir Singh, chief executive of market analysts RANsquawk, said: “Even by the inscrutable standards of Mario Draghi, the ECB president’s speech revealed little of huge tectonic pressure that has built up under the eurozone’s surface. To fly in the face of Germany’s wishes will not have been easy. For the Bundesbank, keeping inflation in check is an article of faith. Its president has made no secret of the fact that he regards the ECB plan to buy the debt of the eurozone’s weaker members as the road to perdition.”

Draghi said the buying-up of bonds, which will be known as outright monetary transactions (OMTs), would be unlimited and that countries benefiting from the scheme would need to submit to certain conditions. The ECB would seek the involvement of the IMF to design and monitor such programmes. Governments to benefit from the OMT would also have to be attached to a programme with one of the eurozone bailout funds. Draghi said the ECB would stop buying a country’s bonds if it failed to comply with the bailout programme.

The ECB said it would buy bonds with a residual maturity of one to three years. That means it can buy bonds with a longer maturity, as long as they only have three years remaining until they are paid back.

As expected, the ECB said the bond-buying programme would be “sterilised”. This means the central bank will not increase the money supply as a result of the bond purchases; instead it will take the equivalent amount of money out from other parts of the system.

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European Central Bank president Mario Draghi announced the details of a bond-buying program to bring down borrowing costs. Here is a list of 10 essential terms that traders need to know before the ECB plan is activated…



Powered by Guardian.co.ukThis article titled “ECB bond-buying: 10 essential terms” was written by Josephine Moulds, for guardian.co.uk on Thursday 6th September 2012 11.45 UTC

European Central Bank president Mario Draghi is expected to announce the details of a bond-buying programme to help keep down borrowing costs of crisis-hit countries later on Thursday. Leaks suggest it will involve unlimited purchases of government debt that will be “sterilised” to assuage concerns about printing money.

The bond-buying scheme is rumoured to be called the “outright monetary transactions”, with a shorthand title of OMT.

Maturity

The life of a bond, at the end of which it will be repaid in full. A bond’s maturity can be as short as a year to as long as 100 years.

Seniority

This refers to how likely you are to be repaid if a bond issuer goes bankrupt. Bondholders with seniority over others will be paid back before other bondholders. There was some concern that the ECB would demand seniority over other bondholders when it undertook the bond-buying scheme, but leaks now suggest otherwise.

Unanimity

Was the ECB governing council united in backing Thursday’s decision, or was there opposition? Bundesbank head Jens Weidmann has spoken out against a bond-buying programme before – is he now onside? Was the ECB split over interest rate levels, or were the decisions unanimous? Draghi’s answer to these questions (which will surely come up) could be crucial.

Pari passu

A Latin phrase meaning “equal footing”. In the bond markets, this means bondholders will be treated the same if a bond issuer goes bankrupt. Any purchases the ECB makes as part of its bond-buying programme are expected to be pari passu with other bondholders.

Collateral requirements

The ECB asks banks for collateral in return for taking out cheap loans. If they relax collateral requirements, they can accept a wider range of assets as collateral from banks. They have already relaxed these requirements, and can now accept everything from bundles of car loans to mortgage-backed securities.

Conditionality

This is the way the ECB would keep the Germans happy, by imposing conditions on receiving assistance from the ECB; so, if the ECB helps keep a country’s borrowing costs low by buying up its bonds, that country may have to agree to some strict austerity. Without conditionality it would be easier for the ECB to unilaterally intervene.

Convertibility risk

This refers to the risk that you will buy bonds denominated in euros but could ultimately be paid back in lire or drachma (or deutschmarks) if the country taking out the debt leaves the eurozone before the end of the bond’s life.

Unlimited intervention

Exactly what it says on the tin. Expectations are that the ECB will not put a limit on its bond buying. This is seen to be an improvement on the previous bond-buying programme, which was limited in size and therefore lacked credibility in the markets. If other traders do not believe the ECB has the firepower (or inclination) to buy enough bonds to bring down yields, they may continue to bet on them rising.

Sterilisation

This makes sure the money supply does not increase as a result of the bond-buying programme. When the ECB buys bonds, it is injecting liquidity into the financial system, effectively creating new money. To counteract that, the ECB has in the past followed bond purchases by subsequently draining an equal amount of liquidity from the system. It does this at the weekly deposit tender by increasing the rates it will pay commercial banks to deposit money with the ECB. The idea is that this will encourage banks to deposit more money with the ECB, thereby taking it out of the system.

Yield cap

Rumour had it that the ECB would set a yield cap on certain countries’ government bonds. This would mean if the yield looked like it would break through that level, the ECB would start buying bonds to push prices higher and bring yields back down.

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