Euro Drops; ECB Says Smaller Monthly Asset Buys Not Tapering

  • Draghi says ECB can increase size, duration of QE if needed
  • Tweaks to technical details stifle uptick in euro area yields

The euro dropped more than 2.5% from its session high as the European Central Bank announced a slimmed down asset purchase program to begin in April 2017 that ECB President Mario Draghi insisted should be viewed as an extension of the current program and not a tapering of bond purchases.

The ECB also announced some technical adjustments to the asset purchase program, including the intention to buy bonds yielding less than the deposit rate, a move that took the wind out of a brief uptick in European and U.S. bond yields and undercut the euro against all of its peers.

The German bund yield rose as high as 45bps before most of its gain evaporated, while the U.S. Treasury 10-year yield touched 2.4234% before it fell back to about 2.39%.

  • EUR/USD rose to session high as UST and EGB yields surged after the ECB said that it will extend its asset purchase plan at EU60b/month from April to December 2017, replacing the EU80b/month program that was set to expire at the end of March
  • After tripping stop-loss buy orders in a swift climb to 1.0874, EUR/USD did a sharp about-face as traders scrambled to unwind longs and build fresh shorts; EUR/USD hit a fresh low in afternoon trading on a report that some governing council members had pressed for a 12-month extension of the asset purchase program
  • As the USD rose vs the euro, gains also spread against other G-10 peers, allowing the Bloomberg dollar index to reverse an overnight dip to round out the day with a gain of ~0.6%
  • FX flows were brisk in the session, though sparse liquidity made for difficult trading conditions, especially when trying to fill EUR sell orders, a trader in London said; model-driven funds and others set fresh EUR shorts as key technical levels were breached below 1.0760, another trader said
  • The dollar also rose vs a majority of EMFX as the initial prospect of higher global bond yields curbed risk appetites
  • USD/JPY rose as high as 114.38 amid the broader dollar rally that saw the greenback gain vs most its G-10 peers; earlier, the dollar tone had been more defensive with losses vs most
  • FX trading action subsided dramatically in afternoon trading as some players pared positions, likely content to book quick profits after a sharp move
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