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ECB Meeting Summary: April 10, 2019

Core Content Overview

This report from BNP Paribas provides an analysis of the European Central Bank (ECB) press conference held on April 10, 2019, focusing on the ECB's monetary policy stance, the implications of its statements on financial markets, and expectations for future policy actions, particularly related to the TLTRO III and tiering measures.

Key Messages from the ECB

• Determined to Achieve Price Stability: Mario Draghi emphasized the ECB's readiness to act and its commitment to achieving symmetric price stability, which allows for deviations both above and below the 2% target. This signals a shift from the earlier perception that the ECB was resigned to missing its inflation target for a long time.

• Reinforced Dovish Tone: The ECB's message was more aggressive than the March meeting, showing a stronger sense of urgency and willingness to take action if necessary, including potential rate cuts.

• No Immediate Policy Action: Despite the more assertive rhetoric, the ECB did not announce any concrete policy changes. The discussion on TLTRO III and tiering was left for future meetings, with the ECB suggesting that June could be a potential time for a pre-announcement.

Market Views

FX Market

• The EUR has declined slightly following the ECB meeting, with EURUSD retracing more than 50% of its recent gains.
• The firm maintains a EURJPY short position (120 digital, 1-Aug-19 expiry).
• The current implied volatility allows for positioning for an upside breakout in EURUSD and hedging against a downside collapse.
• A EURUSD 1.10/1.18 strangle is funded by a 1.2969/1.3796 strangle (6m expiry, initiated on 28 March 2019).
• The firm does not believe the current volatility levels are justified.

Interest Rates

• The ECB's disappointment trade continued, with the yield curve flattening, Bund yields moving into negative territory, and breakeven inflation forwards extending to 16 years.
• The ECB's forward guidance was unchanged, but the discussion on tiering has a strong signaling effect.
• The firm favors positive carry and low volatility positions, with a long 10y OAT vs Bund, swap and olos strategy.
• It is expected that 5y5y/15y15y will flatten, while 10y Bunds are expected to underperform the barbell of 5- and 30-year bonds.

TLTRO III and Tiering

• The ECB is expected to announce a relatively generous TLTRO III.
• Tiering is now more likely than not and could be pre-announced as early as June.
• The timing of implementation is more uncertain, with the firm anticipating a formal announcement later in the year, possibly after October when the transition from Eonia to €STR occurs.
• The criteria for TLTRO III suggest it will be a response to a deteriorating macroeconomic outlook, not just to ease funding pressure.
• The introduction of tiering is seen as a move to improve the transmission mechanism of monetary policy, which is less controversial than supporting banks' profits.
• While tiering was not explicitly mentioned, it is implied that the ECB is considering measures to mitigate the side effects of negative rates.
• The threshold for action appears lower than previously thought, with even a modest improvement in the macro outlook potentially triggering both TLTRO III and tiering.

Conclusion

• The ECB's more aggressive rhetoric is a positive development compared to the March meeting, but action is still needed to change market sentiment.
• If the economy fails to return to trend growth, the ECB's dovish stance will need to translate into concrete policy measures.
• The firm remains optimistic about a generous TLTRO III and the introduction of tiering, but timing remains uncertain.
• The ECB's symmetric inflation objective is a key factor in its current policy stance, aiming to dispel the notion that the 2% target is a ceiling.

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Disclaimer

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