Tuesday, January 20, 2015

ECB Meeting Primer: The Wise Men At The Table

The big ECB meeting on Thursday. It seems Draghi has almost managed to pull it off with QE with most of the stake holders. But I do no think it is signed sealed and delivered yet. The voting on the particular day can still have some fireworks left.

Personally Mr Draghi has all the incentives to go all in, irrespective of whether he ever runs for  the President of Italy. The question is about the rest. Below is the table showing the voting rights on 22nd Jan (the voting rights are changed since 2015 after Lithuania's accession to EU).

On the numbers, 1 signifies strong yes, -1 a strong no, and 0 is the nutral. This is based on recent news bytes.

On paper, it seems QE should go through. At least in some form. The real question is how it will look like? Full metal jacket or a run-down version. In rates, the best way to position for this event is pretty much tilted to longs. If QE happens there is a chance of selling off, but should be limited. In fact it may rally as well. But if no QE, rates are definitely going to rally out of deflation fear.

On EUR/USD it is a bit tricky. It is anybody's guess to what extent the recent euro weakness has been driven by QE expectation. If you look at the sharp drop in recent time from the 1.25 levels, it seems most of it is QE driven. So if no QE, at least the knee-jerk reaction to rally will be large. If we do have a QE, for a strong sell-off in EUR/USD we would really need a pleasant surprise from ECB, not the run-down version already priced in. So best path is to go long with sizes where you can take the pain. If it does rally, reverse the position on Greece election coming Sunday.

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