Back
5 Jun 2014
Analyst reactions to Draghi comments
FXStreet (London) - The European Central Bank (ECB) announced a 10 basis point rate cut of 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.
In addition, ECB president, Mario Draghi announced that, If required, further monetary policy easing is possible and that the ECB is unanimous in its commitment to using other unconventional instruments within its mandate. Negative rate will also apply to excess reserve holdings and certain other deposits held with the Eurosystem. The Eurosystem will consider purchasing simple and transparent asset-backed securities, while the ECB’s Securities Markets Programme sterlisisation has been suspended
State Street – Tim Graf, Head of Macro Strategy - Europe
The reaction is interesting in that, even though there was no surprise whatsoever about the 12.45 events, the EUR is weakening and Bunds/BTPs rallying. The risk that we all talked about was that this was fully priced and you could have seen the reverse happen after what was largely a consensus result. For me, this weights the risks for the press conference more towards EUR weakening. In other words, if the bare minimum versus expectations results in weaker euro and higher bonds, surely whatever non-standard policies to come should add to the downside pressure in the EUR.
HSBC – David Bloom, Global Head of FX Strategy
The EUR is set to resume its decline following the ECB's announcement of interest rate cuts and fresh measures to boost Eurozone liquidity. The ECB has proved the doubters wrong. Although the initiatives fell short of outright quantitative easing, in combination they are more aggressive than the market had been expecting. The EUR is already dropping afresh in response and should continue to weaken.
With the earlier announced interest rate cuts already in the price, an extension of the EUR sell-off was always going to rely upon some degree of "shock and awe" for the liquidity measures. It appears the ECB has recognised this and over-delivered.
Our year-end forecast for EUR/USD remains USD1.28 and today's developments are entirely consistent with this view. The market likes to doubt the ECB's willingness to act aggressively, but once again, the central bank has shown its appetite for action when required.
TD Securities – Richard Kelly, Head of European Rates and FX Research
So in the prepared remarks, Draghi may shift things around but the first questions should be whether they change their forward guidance language. We think this one has kind of fallen through the cracks a bit in the market but the key is that they firmly reiterate that that the key ECB interest rates will remain at present or lower levels for an extended period of time. If they change that to say at present, and the leave out “or lower” it implies we are at the floor and euro is going to shoot back up.
After that paragraph should come the announcement in liquidity and credit support, that as I said, Draghi could mix that up and talk asset purchases before the forward guidance. But this is where the details and market reaction are more fuzzy. We think smaller not larger. Something of maybe 50-70bn in buying of ABS or a smaller funding for lending style LTRO where funds are tied to new bank lending, as opposed to peripheral carry trades. If so, that should add to excess liquidity, depress rates, and thus depress euro, rather than push it higher on the back of better risk sentiment.
Societe Generale – Kit Juckes, Head of Foreign Exchange Research
Mr Draghi is still speaking, but the jist is that he is doing everything short of full QE to support the economy, and that will be reflected in stronger asset prices generally. The ECBs announced measures are also very close to the predictions of SG economics, so a hat tip top them. And the carrot of full QE is still dangling in front of us.
Benoit Anne is now very bullish European EM assets - bonds and currencies. I would just echo that and say the same applies for asset prices across Europe.
For the Euro, that's the problem. These moves get rates down, but 2yr euro rates are down a dizzy-making 2 (yup, TWO) bps on the news. And if money flows into Euro assets, how does this get the Euro markedly lower? I see how this brings money into Europe, and how it sends a signal, but I can't see why much money flows out. So, I still prefer selling Euros vs EMFx, and vs our mini basket of NOK, PLN, TRY and GBP than wade into EUR/USD here.
For the economy, the underlying concerns remain. Fiscal policy is still tight, banks are still cautious, borrowers still even more cautious. No reason to change growth forecasts.
In addition, ECB president, Mario Draghi announced that, If required, further monetary policy easing is possible and that the ECB is unanimous in its commitment to using other unconventional instruments within its mandate. Negative rate will also apply to excess reserve holdings and certain other deposits held with the Eurosystem. The Eurosystem will consider purchasing simple and transparent asset-backed securities, while the ECB’s Securities Markets Programme sterlisisation has been suspended
State Street – Tim Graf, Head of Macro Strategy - Europe
The reaction is interesting in that, even though there was no surprise whatsoever about the 12.45 events, the EUR is weakening and Bunds/BTPs rallying. The risk that we all talked about was that this was fully priced and you could have seen the reverse happen after what was largely a consensus result. For me, this weights the risks for the press conference more towards EUR weakening. In other words, if the bare minimum versus expectations results in weaker euro and higher bonds, surely whatever non-standard policies to come should add to the downside pressure in the EUR.
HSBC – David Bloom, Global Head of FX Strategy
The EUR is set to resume its decline following the ECB's announcement of interest rate cuts and fresh measures to boost Eurozone liquidity. The ECB has proved the doubters wrong. Although the initiatives fell short of outright quantitative easing, in combination they are more aggressive than the market had been expecting. The EUR is already dropping afresh in response and should continue to weaken.
With the earlier announced interest rate cuts already in the price, an extension of the EUR sell-off was always going to rely upon some degree of "shock and awe" for the liquidity measures. It appears the ECB has recognised this and over-delivered.
Our year-end forecast for EUR/USD remains USD1.28 and today's developments are entirely consistent with this view. The market likes to doubt the ECB's willingness to act aggressively, but once again, the central bank has shown its appetite for action when required.
TD Securities – Richard Kelly, Head of European Rates and FX Research
So in the prepared remarks, Draghi may shift things around but the first questions should be whether they change their forward guidance language. We think this one has kind of fallen through the cracks a bit in the market but the key is that they firmly reiterate that that the key ECB interest rates will remain at present or lower levels for an extended period of time. If they change that to say at present, and the leave out “or lower” it implies we are at the floor and euro is going to shoot back up.
After that paragraph should come the announcement in liquidity and credit support, that as I said, Draghi could mix that up and talk asset purchases before the forward guidance. But this is where the details and market reaction are more fuzzy. We think smaller not larger. Something of maybe 50-70bn in buying of ABS or a smaller funding for lending style LTRO where funds are tied to new bank lending, as opposed to peripheral carry trades. If so, that should add to excess liquidity, depress rates, and thus depress euro, rather than push it higher on the back of better risk sentiment.
Societe Generale – Kit Juckes, Head of Foreign Exchange Research
Mr Draghi is still speaking, but the jist is that he is doing everything short of full QE to support the economy, and that will be reflected in stronger asset prices generally. The ECBs announced measures are also very close to the predictions of SG economics, so a hat tip top them. And the carrot of full QE is still dangling in front of us.
Benoit Anne is now very bullish European EM assets - bonds and currencies. I would just echo that and say the same applies for asset prices across Europe.
For the Euro, that's the problem. These moves get rates down, but 2yr euro rates are down a dizzy-making 2 (yup, TWO) bps on the news. And if money flows into Euro assets, how does this get the Euro markedly lower? I see how this brings money into Europe, and how it sends a signal, but I can't see why much money flows out. So, I still prefer selling Euros vs EMFx, and vs our mini basket of NOK, PLN, TRY and GBP than wade into EUR/USD here.
For the economy, the underlying concerns remain. Fiscal policy is still tight, banks are still cautious, borrowers still even more cautious. No reason to change growth forecasts.