While it’s nearly universally expected that the ECB council meeting will deliver further easing on December 3rd, the exact make-up of the package remain uncertain. Yesterday, under conditions of anonymity, an ECB official indicated that options for next week’s ECB rate decision meeting are still being debated. One official was quoted as saying the ECB “are still trying to figure out what will be in the package. A lot of people have different views.” One such option would include introducing two-tiered deposit rates and buying re-bundled loans on non-performing loans. The news has introduced the possibility of a surprise move by ECB President Draghi. The easing options for the ECB are extensive but we think a more vanilla policy mixed would be more effective and the likely direction. Draghi is likely to withhold more exotic easing measures in the event that inflation and growth projections move downwards again. That said, given Draghi’s historical reputation for over-delivering we suspect that he will not disappoint the high market expectations in whatever makeup of the final package hits the market. We are anticipating that Draghi will go big with a full suite of policy actions. The main deposit rate is expected to be cut 20bp (10bp consensus). There is expected to be a €10bn monthly increase in purchase accounts and 12-month extension of the program to September 2017. Also, Draghi’s language will be significantly dovish indicating that more easing is possible should economic conditions warrant. The additional easing is keeping EURUSD under selling pressure, despite the already crowded nature of the long USD trade.
This aggressive strategy will have a real effect on EURCHF indicating that the SNB will have to respond with policy action of their own. The SNB is likely to tighten current negative rates loopholes and cut deposit rate further (near -1.00%) from current -0.75% level. We view the CHF as one of the best short opportunities against EUR, USD and higher yielding EM currencies.