He did it, Draghi turned on the lights when the market least expected. The ECB cut its refi-rate by -0.25%, to just above zero on Thursday. Perhaps more importantly and because of the global benign inflation phenomena, the Euro policy makers kept the downward bias to its forward guidance. In other words, the door was kept open to take Euro deposit rates into negative territory.
Negative deposit rate are generally tied to a more deflationary economic backdrop, the late 90’s in Japan is a good example. Europe is not there yet according to Draghi. During yesterday’s press conference he indicated that there is no danger of deflation, although policymakers expect a prolonged period of low inflation.
By breaking its own conservative mold, the ECB’s unexpected rate announcement indicates a more proactive approach from policymakers to address the heightened concerns across Europe. Any further downside movement from an already fragile recovery combined with weak inflation is likely to be accompanied by further ECB action now that they are in “proactive gear.”
The surprise ECB cut has steepened the 5/30’s curve to ten-year highs. Can this move much further? Fixed income dealers thinks the spread looks rich, and without negative deposit rate cuts the top could be close. However, expect risk premiums to be applied for Q1 Eonia 2014 meet.
The EUR has not backed away from it initial -1.5% fall, aided by Friday’s NFP surprise. Last February was the last time that the ECB was so blatantly dovish. The EUR is expected to become an increasingly attractive funding currency for the remainder of this year. For now, and until investors are told otherwise, the Federal Reserve will continue to try to communicate that its policy will remain loose, presumably under the guise of transparency and through tapering environment conditions. That ought to keep rates low for a considerable length of time. Under this scenario, the EUR should be capable of finding some support close to the 1.3000 levels.
- ECB Running Out of Policy Tools –
- S&P Cuts France’s Credit Rating –
- UK Trade Deficit Widens As Exports Drop –
- Nissan CEO Would Reconsider Business Strategy if UK Exits EU –
- Economic Activity in the EZ Remains Weak –
- UK Manufacturing Output Rises 1.2 Percent –
- Bank of England Hold Rates Waits for Unemployment to Improve –
- ECB Cuts Rates Deflates Euro –
- Italian Banks Won’t Fail Stress Tests Says FinMin –
- Italian Finance Minister Urges ECB to Act on Strong Euro –
- Eurozone Sales Drop in September –
- UK Industrial Output Beats Expectations in September –
- ECB: High-Frequency Trading Increases Price Efficiency –
- OECD: Europeans Less Satisfied than Others –
- Greece To Explain Budget Shortfall to Troika –
- UK Think tank Forecasts British Growth to Accelerate in 2014 –
- European Commission Says Turning Point is Here But Less Growth Expected –
- Spanish Jobless Rise After End of Vacation Period –
- UK Economy Set to Be Fastest Growing in the West –
- European Manufacturing Grows, Except in France –
- Deflation in Europe Could Signal Stagnation in 2014 –
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.