All taste, no nourishment – Draghi’s crises response fails to appease

As anticipated, it was the ECB’s policy decision at the centre of attention overnight, and once again markets walked suitably disappointed. While signalling the bank may “undertake outright open market operations of a size adequate to reach its objective,” ECB president Mario Draghi failed to provide the concrete crisis response markets expected. In short, the ECB may intervene in the secondary market, with a focus on shorter-term maturities, but only in conduction with the Europe’s rescue fund, the European Financial Stability Facility (EFSF). Any country which is a recipient of these bond purchases will be under strict conditionality, implying the need for countries such as Spain and Italy to first seek financial aid, before benefiting from ECB/EFSF joint bond market intervention. It will be “up to the countries to decide whether they need and want the help of the EFSF,” Draghi noted, while stating bond purchases would be “adequate in size and may or may not be sterilized depending on whether the ECB regards that necessary to maintain price stability.” If left unsterilized, the European Central Bank would effectively be embarking on a U.S style quantitative easing program. The finer points of Draghi’s ‘grand effort’ may not be known until the next policy meeting. As expected, the ECB left benchmark interest rates on hold at 0.75 percent, and although discussed in the policy meeting, made no indication of the likelihood of further interest rate cuts.

Currencies reflected this disappointment with earlier significant gains across the risk spectrum quickly unwound as markets digested Draghi’s crisis response, or lack thereof. The Euro made a brief appearance above 1.24-figure before the trajectory switch sharply south bottoming out around $US1.2133. The Aussie followed a similar path moving to highs of 105.83 US cents before succumbing to a broad sell-off with the greenback the prime beneficiary. After falling to lows of 104.35 US cents, the local unit has consolidated higher at current levels of 104.6 US cents.

Local releases on the docket today include the AiG Services Index for July at 10.30am AEST followed by official Chinese services PMI at 11am. The HSBC equivalent is due for release at 12.30pm AEST. To cap off a solid week of event risk, this evening’s U.S payroll will now take centre stage. The U.S economy will add 100,000 new jobs in July according to consensus estimates, slightly higher than the 80,000 new positions added in June. The official unemployment rate is expected to remain at 8.2 percent.

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