ECB All Hands On Deck

Draghi and his fellow cohorts at the ECB have finally decided to throw everything at beating back Europe’s twin threats of ‘deflation’ and ‘growth’ problems.

In his post announcement press conference Draghi announced the suspension of the “sterilization” of bond holdings, the preparation for the purchases of Asset Backed Securities and longer term loans of €400billion. This follows their expected cut to both its benchmark rate (0.15%) and deposit rate (-10% – pushing it into negative territory for the first time in their history).

In translation, everything that was realistically possible to implement they are going to do – the ECB seems to be going for broke. In reality, what’s likely to work will be the ABS purchases, but before it can, that market needs to get bigger (more structured and more liquid) as they are really only in the prepping stage. The ECB needs to buy “big” to make any meaningful impact.

So far, the EUR’s drop on the back of the cuts have been short lived (€1.3505), currently trading atop of the stateside open as the market questions if the ECB is being proactive and aggressive enough (€1.3617). It seems the markets mid-morning take is that the ECB’s refi and deposit rate cuts are “puny” and look very “cosmetic.” The hope is that negative deposit rates (-0.1%) will deter banks from parking cash at the ECB. With negative deposit rates not being qualified, banks will surely be able to pass along this cost to its customers?

The EUR ends bullish on the day – closed above pivotal €1.3651 200-DMA. Market should expect Asian risk appetite to be subdued ahead of tomorrow’s payroll number (consensus looking for +210k headline print). Any negative surprises and the EUR will have more support. A strong headline will keep the FED on track and aid the ECB’s best of intentions. Anything in the middle and the market will find it difficult justifying full engagement.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell