By Joseph Adinolfi, MarketWatch
Draghi says ECB won't buy bonds with yields below -0.2%
NEW YORK (MarketWatch) -- The euro fell to a fresh 11-year low
Thursday after European Central Bank President Mario Draghi said
the central bank wouldn't buy bonds with yields lower than the
central bank's deposit rate of negative 0.2%.
The euro (EURUSD) traded as low as $1.1005 Thursday, its lowest
level since September 2003 and it (EURGBP) also hit a multiyear low
against the pound of 72.23 pence, its lowest level since December
2007.
On Wednesday evening, the shared currency had traded at 72.58
pence and $1.1077 to the dollar.
During his Thursday news conference in Nicosia, Cyprus, Draghi
struck an upbeat tone in his initial statement, saying that the
recent stream of stronger-than-expected eurozone economic data has
led the ECB to revise its economic projections upward. The central
bank now expects annual real GDP to increase by 1.5% in 2015, 1.9%
in 2016 and 2.1% in 2017.
"The risks surrounding the economic outlook for the euro area
remain on the downside but have diminished following recent
monetary policy decisions and the fall in oil prices," Draghi
said.
The euro traded higher after the initial statement, hitting a
session high of $1.1116, but its momentum was abruptly halted
during the question-and-answer session, after Draghi said the
central bank wouldn't buy eurozone bonds with yields lower than its
deposit rate of negative 0.2%.
Josh O'Byrne, a London-based G10 FX Strategist with Citigroup,
said this means the spread between short-term and long-term
eurozone bonds will compress as the ECB buys longer-duration debt,
dramatically reducing the risk premium for buying longer-duration
debt, and giving investors more incentive to look abroad for
higher-yielding debt.
"Given that a lot of core [euro-denominated] fixed income is
already trading below that [negative 0.2% yield], this means
there's going to be increasing purchases further on the curve,"
O'Byrne said. "If you have some discretion, you're not going to be
[buying eurozone debt]."
Draghi didn't mention the euro in his policy statement, a
departure from recent meetings where he highlighted the impact of
diverging monetary policy in Europe and abroad on exchange
rates.
O'Byrne said that this means the push for a lower euro will no
longer be driven by policy makers, but by investors coping with the
side effects of the ECB's stimulus measures.
"Behind the scenes, I think they would rather see [the exchange
rate] stabilize, but the market is going to do what it's going to
do, and having fewer attractively-priced assets in the market is
going to increase the incentive for outflows," O'Byrne said.
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