• The Governing Council of the European Central Bank (ECB) did not make any changes yesterday to the main refi rate, which remains at 0.05%, or to the deposit and marginal lending facilities rates which are still at -0.2% and 0.3% respectively.
• We saw little new in yesterday’s ECB press conference, in line with other recent monetary policy meetings of major central banks, including the Norges Bank, the Reserve Bank of Australia (RBA), the Bank of Canada and the National Bank of Poland.
• ECB President Mario Draghi confirmed their view of an improvement in the momentum of growth in the Eurozone over the first quarter of 2015, noting that the risks to growth are more balanced as a result of recent monetary policy decisions, the fall in oil prices and the fall in the value of the euro. In addition, the ECB’s expectation is for the recovery to broaden while still remaining dampened due to structural factors and “sluggish” implementation of structural reforms.
• Draghi noted that it is premature to consider an end to the QE programme before September 2016 given that it has only just commenced, effectively communicating a commitment to the full implementation of the programme.
• The ECB commenced QE on 9th March, including the purchase of bonds with negative yields up to the deposit rate (-0.2%). This provides support for core European sovereign bonds which now have negative yields in at the least the front end of their respective curves, as well as peripheral sovereign bonds such as Portugal whose 10-year yield is lower than that of the 10-year US Treasury[1].
• We retain our thesis that we will see increasing monetary policy divergence as the year progresses. Thus far, most central bank action in 2015 has been on the loosening side, which has been reflected in the bond markets, such as the widening spreads between German Bunds and US Treasuries[2].
• Our base scenario remains that the US Federal Reserve and Bank of England, which had both previously pursued QE programmes, will tighten their monetary policy stances this year. These views are reflected in our positive view of the US dollar, via a long USD position versus a basket of emerging market and G10 currencies and our short duration positioning in UK rates.
• We are very cognisant of the risks around liquidity and volatility in the markets. We see the potential for further volatility as liquidity issues arise once markets begin to focus on the large imbalances and crowding in certain sectors that formed during the protracted era of very loose monetary policy and when the divergence of monetary policies does become more pronounced.
• The RBA kept the cash rate unchanged again at 2.25% last week, disappointing many market participants who had been expecting a rate cut. Nevertheless, we expect the RBA to maintain an easing bias. As such, we remain long Australian government bonds and are short the AUD as the demand for commodities and commodity prices remain weak.
• Regarding Japan, we are positioned with a Japanese government bond curve flattener and we remain short the yen.
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