Draghi Delivers, What’s Next for the Euro?

The combined announcements of broad rate cuts, ABS purchases and covered bond buying were a surprise on Thursday and punished the euro. It was easily the worst performer while the US and Canadian dollars jumped on better economic data. It will take days for the market to digest the moves and we look at what's next. 700 pips realized today: Our Premium short in GBPUSD, entered in 1.6600, hit its final 1.6400 target for 200 pips, 1 of our 2 EURJPY shorts hit its final 136.10 target from the 138.10 entry with 200 pips, and the USDCHF long at 0.9020, hit its final 0.9320 target for 300 pips. All these trades are found in our Premium Insights.

The ECB is taking assets onto its balance sheet in the first sign of QE from Draghi. Some of the shock of the announcement was tempered by a leak to Reuters ahead of time but the combined measures along with the looming TLTRO smashed the euro more than 200 pips lower to 1.2920 before a modest rebound to 1.2935.

The only mitigating factors were that Draghi said there was some dissent, despite a comfortable majority in favor, and that the size of the program wasn't announced. Draghi did say the ECB wants to increase its balance sheet back to the 2012 size and that would mean 1 trillion euros but how much is divided between ABS, covered bonds and the TLTRO remains murky.

For traders and the general public the message is clear. The ECB finally grasps the severity of the economic malaise in Europe and is prepared to take dramatic steps. That's not the sort of declaration that results in a one-and-done move. Asset managers and hedgers will change course over the coming weeks and although there will be euro inflows into risk assets like stocks or anything that could be boosted by ABS buying, the sellers on lower carry will eventually win out.

We believe that many fast money euro shorts will have taken profits on today and the lack of any sort of bounce shows the selling demand. That said, it's very tough to initiate new shorts after a 6 big-figure move. A good sense of the speed of the move down to 1.27 or 1.25 will come from how quickly and aggressively traders sell the next bounce.

We will also keep an eye on the other side of the EUR/USD trade with non-farm payrolls looming. In Asia-Pacific trading, watch for comments from the Fed's Powell, Fisher and Kocherlakota. Powell will likely stick to regulation and Fisher will be predictably hawkish but if Kocherlakota softens his dovish tone it could boost the US dollar.