ECB rejects report about bond-buying revival
THE European Central Bank (ECB) yesterday brushed aside a report in Germany’s Der Spiegel magazine that it was considering setting yield thresholds for any moves to buy the bonds of struggling euro sovereign debtors.
The ECB said it was misleading to report on decisions that had not yet been taken.
Traders said the Der Spiegel report had earlier boosted the euro by lending weight to the view that the ECB would revive its controversial bond-buying programme.
The euro later fell, and was also weighed down by Germany’s powerful central bank reasserting its concern about ECB bond-buying, which it said posed "considerable risks to stability".
The Bundesbank said it was fiercely opposed to any plan of ECB president Mario Draghi to restart the bond-buying programme, on the grounds it amounted to monetary financing of governments, contravening European law. The bank said in its monthly report, released yesterday, that the volume of bond buying "could be unlimited, and should in any case be sufficient".
The euro’s fall was expected to be limited, with the chances of the ECB taking action once the European holiday season ends leaving investors wary of selling the euro aggressively, analysts said.
The euro fell 0.3% to hit a session low of $1.2296, though it stayed within the $1.2240-$1.2450 range it has hugged in the past two weeks. It held above chart support at its 21-day moving average of $1.2285.
"The Der Spiegel report talking about a possible cap in peripheral bond yields gave the euro a slightly positive tone in early trade, but the negative comments since have taken the gloss off and we have seen it drift lower," said Richard Wiltshire, the chief foreign exchange broker at ETX Capital.
Market players have been wary about German opposition to ECB bond-buying. But last week, German Chancellor Angela Merkel offered a robust defence of Mr Draghi, who has been widely criticised in Germany for promising to do "whatever it takes to preserve the euro" and signalling his readiness to resume the controversial bond-buying programme.
Against the yen, the euro fell 0.3% to a session low of ¥97.79. But it stayed not far from a six-week high of ¥98.43 hit on Friday as the prospect of ECB action kept investors positive and weighed on the safe-haven Japanese currency.
Morgan Stanley analysts recommended buying the euro against the yen on expectations Ms Merkel will "maintain support for the Draghi plan" and that "positive rhetoric will likely continue", adding that investors remain short of the euro against the yen. "We expect policy events in Europe to continue to provide the euro with broad support in the near term, despite the prospect of continued weak growth indicators," they said in a note to clients.
The provisional estimates to eurozone purchasing managers’ surveys are due for release on Thursday while traders awaited possible hints on a eurozone crisis solution later this week.
French President Francois Hollande and Ms Merkel will meet on Thursday, a day before Greek Prime Minister Antonis Samaras arrives in Berlin.
The dollar was steady at ¥79.49, having hit a five-week high of ¥79.66 in early Asian trade. Improvements in US economic data have lifted US government bond yields. The 10-year US Treasury yield rose to 1.81% yesterday, bringing the yield advantage over Japanese government bonds close to one percentage point, the most in more than three months.
"The steepening of the US yield curve no doubt has led to a rise in dollar-yen," said Adam Myers, currency strategist at Credit Agricole.
"The yen will continue to stay under pressure as investors are more willing to take on risk on expectations that something positive will emerge from the eurozone in the near term. Any disappointment will see the yen being bought again."
Movements in the dollar versus the yen tend to have a strong correlation with the spread between US and Japanese yields.
Analysts say if US Federal Reserve minutes later this week show there has been an active discussion to provide additional monetary stimulus, this could put the dollar back under pressure and generate a rally in risky assets.
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