6 Jun 2014
Analyst roundup: ECB – the morning after the day before
FXStreet (London) - Yesterday, the European Central Bank announced a 10-basis point rate cut on its main refinancing rate, cutting to 0.15 percent, from 0.25 percent. More significantly, the Bank cut the deposit rate into negative territory for the first time – to -0.1 percent from 0 percent. The marginal lending facility rate was cut by 35 basis points from 0.75 percent to 0.4 percent.
Societe Generale – Kit Juckes, Head of Foreign Exchange Research
The ECB's heading into the unknown, risking the unintended consequences of a negative deposit rate as it seeks to stave off deflation, revive lending and weaken the Euro. Yesterday's moves provide some cheap funding for banks, but I doubt they do much to remove the risk of goods price deflation, boost credit creation, or weaken the Euro. But if you haven't got the message that this close to the zero bound, monetary policy does more for asset prices than for the economy, you haven't been awake for the last couple of years. So, I expect the ECB's measures to do more for Eurostoxx, iTraxx XO, even peripheral spreads, than for the economy. So, stay short the Euro, not against the dollar but against higher-yielding European currencies that will gain in a risk-friendly world. Stay Short Euro vs GBP, NOK, PLN and TRY.
As for EUR/USD, the downtrend has started, at snail's pace. As long as we don't go breaking USD1.39 again, anyway. We can accelerate if we do break the USD1.3470 January low, but I'm not holding out much hope. In broad terms a USD1.35-1.39 range is 'home' for now and I'll look to sell rallies within that.
Bank of America Merrill Lynch – Athanasios Vamvakidis, analyst
In our Year Ahead report we argued that changes in relative monetary policies will be a key driver for rates and FX markets in 2014. Using measures of the monetary policy stance in G10 economies, we found ECB monetary policy to be too tight and BoE monetary policy to be too loose, and argued that normalization will be negative for EUR/GBP. Indeed, although the BoE remained on hold yesterday, we see increasing signs of a tightening bias in the months ahead, while the ECB took a number of easing steps and flagged more easing looking forward if inflation fails to increase. EUR/GBP is down by 2.5 percent so far in 2014, but this move may only be the beginning.
Goldman Sachs – Peter Oppenheimer, chief global equity strategist and head of macro research, Europe
Taken together, these bold measures should further ease liquidity conditions and strengthen forward guidance, thereby incrementally easing the existing policy stance. Moreover, the credit easing measures have the potential to exert an additional and possibly larger economic impact, but at best we expect this to materialize gradually, and its magnitude will depend on implementation details that are not yet clear, as well as the evolution of credit demand and broader economic sentiment.
We see today’s measures as a powerful way to anchor the front-end of the EONIA curve close to zero for the next 4 years and in line with this view 4-year EONIA closed today at 25bp. This is likely to feed further compression
of peripheral spreads (we expect spreads for 3-year Spanish, Italian and Portuguese government bond yields to tighten to around 20-30bp above Germany over the next 12 months) and the search for yield more broadly, with corporate credit being a major beneficiary. We are also positive on the ability of these measures to gradually lift medium-term inflation expectations as these measures work their way through to the real economy.
Societe Generale – Kit Juckes, Head of Foreign Exchange Research
The ECB's heading into the unknown, risking the unintended consequences of a negative deposit rate as it seeks to stave off deflation, revive lending and weaken the Euro. Yesterday's moves provide some cheap funding for banks, but I doubt they do much to remove the risk of goods price deflation, boost credit creation, or weaken the Euro. But if you haven't got the message that this close to the zero bound, monetary policy does more for asset prices than for the economy, you haven't been awake for the last couple of years. So, I expect the ECB's measures to do more for Eurostoxx, iTraxx XO, even peripheral spreads, than for the economy. So, stay short the Euro, not against the dollar but against higher-yielding European currencies that will gain in a risk-friendly world. Stay Short Euro vs GBP, NOK, PLN and TRY.
As for EUR/USD, the downtrend has started, at snail's pace. As long as we don't go breaking USD1.39 again, anyway. We can accelerate if we do break the USD1.3470 January low, but I'm not holding out much hope. In broad terms a USD1.35-1.39 range is 'home' for now and I'll look to sell rallies within that.
Bank of America Merrill Lynch – Athanasios Vamvakidis, analyst
In our Year Ahead report we argued that changes in relative monetary policies will be a key driver for rates and FX markets in 2014. Using measures of the monetary policy stance in G10 economies, we found ECB monetary policy to be too tight and BoE monetary policy to be too loose, and argued that normalization will be negative for EUR/GBP. Indeed, although the BoE remained on hold yesterday, we see increasing signs of a tightening bias in the months ahead, while the ECB took a number of easing steps and flagged more easing looking forward if inflation fails to increase. EUR/GBP is down by 2.5 percent so far in 2014, but this move may only be the beginning.
Goldman Sachs – Peter Oppenheimer, chief global equity strategist and head of macro research, Europe
Taken together, these bold measures should further ease liquidity conditions and strengthen forward guidance, thereby incrementally easing the existing policy stance. Moreover, the credit easing measures have the potential to exert an additional and possibly larger economic impact, but at best we expect this to materialize gradually, and its magnitude will depend on implementation details that are not yet clear, as well as the evolution of credit demand and broader economic sentiment.
We see today’s measures as a powerful way to anchor the front-end of the EONIA curve close to zero for the next 4 years and in line with this view 4-year EONIA closed today at 25bp. This is likely to feed further compression
of peripheral spreads (we expect spreads for 3-year Spanish, Italian and Portuguese government bond yields to tighten to around 20-30bp above Germany over the next 12 months) and the search for yield more broadly, with corporate credit being a major beneficiary. We are also positive on the ability of these measures to gradually lift medium-term inflation expectations as these measures work their way through to the real economy.