ECB Update: Draghi Leaves QE On The Table

The European Central Bank's decision to hold interest rates again on April 3 was not surprising, but ECB President Mario Draghi's hint that more radical measures are being discussed, including some form of quantitative easing, is probably the most important policy development since the Outright Monetary Transactions facility was announced back in August 2012.

At this stage, we do not overplay either the likelihood or impact of a full blown quantitative easing programme, particularly since Draghi is still playing down the risks of deflation.

Nevertheless, leaving the QE option on the table should pacify markets for now, paving the way for stimulus later down the road. In our view, this is important, given that the reduction in euro liquidity (a symptom of banks repaying LTRO funds) has seen the EONIA (euro overnight index average) rate move sharply higher in recent trading, a risk we have been flagging since late 2013.

The immediate impact of Draghi's comments has been negative for the euro, with the currency dropping back from key technical resistance around the USD1.38-1.40/EUR level in recent trading. Since we believe the ECB must become more accommodative to ensure that the region's incipient recovery continues, we retain  our forecast for the euro to head lower into H2 2014.

This Week's Trivia Question

In our last question, on March 14 (we skipped a few weeks to provide the answer – apologies), we asked, what aspect of a [particular country's recent] general election does the number sequence 666, 649, 333, and 111 refer to? The answer is that these are the constituency numbers of the North Korean leader in elections in 1998, 2003, 2009, and 2014. The first three numbers refer to the late Kim Jong Il's electoral districts, and the last number, Kim Jong Un's district in 'elections' held in early March. It is unclear why Kim Jong Il chose seat 666 in 1998.

This week's question is as follows: what (fairly mundane) qualification have 70,000 Chinese citizens acquired in South Korea over the last three years, because it is easier and cheaper than back home?  And, on a separate note, which major political leader recently appeared at an election campaign in the form of a giant hologram?