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 Market expectations are sky-high for the ECB to unveil a large-scale
QE programme -- printing money to buy euro zone government bonds --
despite opposition from Germany's Bundesbank. Berlin is also worried
that such purchases could allow spendthrift countries to slacken the
pace of reforms.
A euro zone source said on Wednesday that the bank's Executive
Board, which met on Tuesday, has proposed the ECB should buy 50
billion euros ($58 billion) of bonds each month from March, though
it was unclear how long for.
Markets pumped up by almost a year of jockeying over the issue were
awaiting the crucial details, expected to come at a 1330 GMT news
conference with the bank's chief Mario Draghi.
German and other euro zone bond yields nudged up as investors locked
in some profits from a recent sharp rally, while the region's shares
and the euro inched up to 1,434.40 points and just over $1.1630
respectively.
"The key market focus is likely to be on two things," said analysts
at Goldman Sachs. "(i) the scale and maturity profile of the
programme and (ii) whether the ECB chooses to 'mutualise' the risk
on its own balance sheet or place assets on national central banks'
balance sheets."
Broader market sentiment remained positive for riskier assets,
supported by the aggressive actions of central banks seeking to
fight deflation and avoid losing out in what is fast becoming a
global currency war.
Canada's dollar <CAD=> hit a six-year low after it became the latest
country to surprise by cutting rates on Wednesday, while there was
chatter that countries like Denmark may opt to move again if the ECB
announces a big QE programme.
The ECB has already cut interest rates to record lows, begun buying
private sector assets and funnelled hundreds of billions of euros of
cheap loans to banks, in the hope that they would lend the money on
into the economy and stimulate growth.
Now its last remaining major option is QE, a policy that the U.S.
Federal Reserve, Bank of England and Bank of Japan have all used
with some success.
EVERYONE'S AT IT
European shares were hoping to make it a sixth successive day of
rises. With U.S. futures pointing to positive start for Wall Street
ahead of another busy day of company earnings, MSCI's 45-country
world index was eyeing a fifth day of advances.
The euro traded narrowly, between $1.1629 and $1.1589, moving away
from an 11-year nadir of $1.14595 plumbed last week as the market
trimmed short positions ahead of the ECB QE plan.
Traders though were braced for a volatile session later given how
long markets have been preparing for the ECB to take the plunge into
bond buying.
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Banks like Goldman are expecting the euro to eventually reach parity
with the dollar, but low global inflation is now pushing back bets
on the first U.S. rate hike. That's on top of the nerves about ECB
QE and Greece's elections at the weekend where the anti-EU/IMF
bailout Syriza party lead the polls.
"It could be so volatile, we could trade four big figures on
euro/dollar," said National Australia Bank strategist Gavin Friend.
"There is so much potential for confusion and for it (QE) to be
watered down."
Europe's central banks have also been heavily strained by the
prospect of ECB QE. The SNB was forced to remove its currency cap
last week, Denmark has pushed its interest rates deeper into
negative territory, while two British rate setters at the Bank of
England have dropped calls for a rate hike.
The Australian and New Zealand dollars suffered deep losses
overnight as Canada's latest shock as it cut rates fuelled
speculation the Reserve Bank of Australia could soon follow.
The Aussie fetched $0.8106, having shed more than 1 percent in
Sydney. That had pulled it closer to a six-year trough of $0.8033
set earlier in the month, while the kiwi tumbled to a 2-1/2 year low
of $0.7516.
Crude oil prices and gold were also being dragged around by
expectations that the ECB's decision to launch bond-buying stimulus
could boost growth, but also the dollar, which would put downward
pressure on commodity markets.
Brent crude futures nudged up to $49.5 per barrel and U.S. crude was
up 39 cents at $48.20 a barrel.
The dollar meanwhile dipped against a basket of currencies and to
117.75 on the yen. Japan's central bank had also been in action
earlier and signalled its resolve to hit its ambitious 2 percent
inflation target.
(Editing by Catherine Evans and Keith Weir)
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