Mario Draghi’s speech was as dovish as it could be without actually further easing monetary policy, with a pledge to 're-examine' the 'degree of monetary accommodation' at the December meeting. Mr Draghi noted that European economic growth and inflation had been impacted by negative developments in emerging market economies, which could further weigh on global growth and demand for euro area exports. This now leaves markets expecting the European Central Bank (ECB) to extend the asset purchasing program (APP) at its December 3 meeting. But Mr Draghi also noted the ECB’s awareness of the positive effects of negative interest rates seen by the Swiss National Bank and Scandinavian central banks. This raises the possibility that the ECB could cut deposit rates further from its current -0.2% levels. This prospect was clearly given significant weight as the EONIA six-month futures moved from 19 basis points before the meeting to 24.4 basis points after the meeting.
With such dovish commentary from the ECB, speculation now turns to the Bank of Japan’s (BoJ) 30 October meeting next week. It should be noted that the BoJ has given no hint of an easing bias in any of its recent statements or speeches, and finance minister Taro Aso came out last Friday stating that the BoJ is unlikely to ease. However, given Japan’s recent run of poor data it is quite likely to enter a technical recession in Q3. At the BoJ’s meeting this time last year the economy had similarly entered a technical recession and chose that meeting to expand its Quantitative and Qualitative Easing (QQE) program. Clearly the moves we have been seeing in the Nikkei and the Japanese yen are giving further BoJ easing a viable chance next week.
The Nikkei is up 3.6% over the past three sessions since Japan’s poor September trade sparked easing speculation, while the USD/JPY has risen by 1.1% over the same timeframe. The Nikkei had an excellent session, opening up about 2.2% at its highest level since 1 September and within touching distance of the 19,000 mark. Japan’s manufacturing PMI came in noticeably above estimates for 50.5 at 52.5, but even that didn’t seem to dint easing speculation too much.