Dovish Taper with No Tantrum: Patience and Persistence

The ECB delivered what the market expected in terms of the size and duration of the asset purchases. The ECB initial statement also included a dovish reminder of the extent of the unorthodox monetary policy. The full allocation of the fixed rate reports will continue as necessary. The proceeds from maturing issues will be reinvested for an extended period, and rates will remain at current levels well past the end of asset purchases.

The "lower for longer" scenario appears to be a victory for the doves on the ECB, and is consistent with Draghi's call for "patience and persistence." Draghi seemed intent is encouraging the market to push out in time when the first hike may be delivered. The fixed rate and full allocation of refinancing operations will continue to at least the end of 2019. The ECB could lift its negative deposit rate while the full allotment of fixed rate repos continues, but it seems unlikely to be delivered as soon as the market expected, which was early 2019.

The ECB's balance sheet will expand by 180 bln euros here in Q4 and another 270 bln euros in the first nine months of 2018. The Federal Reserve's balance sheet will shrink $30 bln in Q4 and another $270 bln in the first nine months of 2018. The Federal Reserve has signaled three hikes next year, while the market has discounted a little more than one. The ECB will not hike rates next year, and it is possible that there still another step toward tapering after Q3 2018, meaning the balance sheet expands for all of 2018.

Draghi emphasized three components for the transmission of monetary policy. The rising stock of asset held. The maturing issues will be recycled, and the sums are significant. And there is forward guidance. As we have noted, when the reinvesting of the maturing proceeds is coupled with the new purchases, the gross purchases will remain substantial.

The euro recorded a low just below $1.1740. A close below yesterday's low would be seen as a bearish development. We suspect the $1.18 area offers resistance. A break of the lower end of the recent range, around $1.1725 is needed to signify anything of importance.