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There are a lot of pronounced opinions that the ECB is likely to announce its new bond-buying programme today. What is your opinion on the ECB's initiative?
It is pretty much pre-announced that they are going to engage in conditional bond-buying, meaning that they are going to buy the bonds of some European countries. That is contingent upon these countries, which are applying for Troika's financial support that is seeking a conditional aid-driven programme. As it stands, that means that the ECB is going to buy in the shorter part of the curve: one, two, three year. This is unlikely to have a very large effect upon the ten-year part of the curve, obviously. We might see a certain tightening of spreads, but certainly nothing to any very large or significant extent. The main point here is that this will make things a little bit easier in terms of financing costs, but not sufficiently easier to call this crisis in anyway closer to being over.
In a recent interview the Head of Bundesbank criticized the ECB's latest plans of bond purchases. Do you think that the critic on the programme is justified?
With any governing council, whether it is the BOE, the ECB or the Fed, there will always be certain people, who disagree and certain people, who agree with various policies. That is why there are large boards on central banks, because the diversity of opinions is actually needed. This is quite important. The main point here is of course that if, for example, the ECB goes on purchasing more bonds, that basically means that Germany's contingent liabilities that is in the event of the Eurozone breakup would be a lot bigger. Thus, of course, the Bundesbank President is obviously looking out for Germany's interests, when he expresses criticism of further potential bond buying by the ECB. However, the fact of matter remains that so far what we have seen is that the ECB has to behave with a certain "carrot and stick" approach towards the peripheral countries, because if financing conditions are made too easy, then there is less incentives to actually implement more strict austerity measures and more structural reforms. The bouncing act that you have to do here is quite tricky. The criticism is to be expected, but I do not think that it is going to change the media that come from the bond-buying programme.
What are your predictions concerning the EUR performance?
To a large extent a lot of the bond-buying has already been priced into the market. EUR/USD was trading around 1.22 or even 1.23, when the ECB President Draghi actually announced this in London about a month ago. Since then the pair has hovered near 1.2640-level. From here, we could squeeze a little bit higher, possibly towards 1.27 or even 1.28 in terms of an immediate relief rally. The fact of the matter remains that this type of the quantitative easing from the ECB to make analogy would be a little bit like chemotherapy, in the sense that it will make you sick, before it makes you get better. At the end of the day, what means is that the ECB will be expanding its balance sheet, which other things being equal should lead to lower EUR/USD levels. We are still quite confident that we will be looking at significantly lower EUR/USD levels, probably in the next year, towards 1.15 or even potentially little bit lower.