Draghi Delivers for Now

Draghi has succeeded in reducing the relevance of the Bundesbank’s opposition to bond purchases by making bond-purchases dependent upon ESM conditionality. And by integrating the conditionality of the ESM/EFSF plan into the much-needed bond purchase program, Draghi has also firmly sent the ball back into court of national governments.

The ECB’s bond-buy plan also enables the Fed to buy plenty of time market pressure is relieved off any further central bank uncertainty.

There is no third LTRO, but there is a third bond-purchase program, with conditionality, duration and lack of ECB seniority (ECB will stand alongside other bond buyers in creditor hierarchy).

The ECB unveils bond-buying program in secondary market called Outright Monetary Transactions (OMTs), which will be conditional upon the candidate countries following the austerity program under the ESM, in conjunction with the IMF and the EU (Troika).

The OMT will focus on three-year government bonds, with no quantitative limits and will remain fully sterilised. There are no yield-caps in the program.

The launch of the MOT program shall depend on countries formally requesting aid from the existing rescue fund (EFSF/ESM). This implies that not only the ECB would suspend bond purchases of nations failing to meet the EFSF/ESM, but may also means selling those bonds.

Today’s five-month high in August ADP of 201K supports our stance that no QE3 will take place this month. The seven-year high in prices paid component of ISM manufacturing presented the energy argument against further monetization of debt for now.

EUR/USD is making its fourth consecutive weekly gain, its longest winning streak since October 2010. The pair is testing a 12-month trendline resistance (1.2635), a beak of which brings back the June high of 1.2745. Support rises to 1.2450, resting along the July trendline foundation. This should likely keep EUR/USD cemented above the 1.24, while remaining confined between its 100-DMA and 55-DMA of 1.2595 and 1.2395 respectively.  Fresh interest is expected to re-emerge near 1.2450s for a retest of the July top near 1.2660s.