6 Feb 2014
Flash: EUR downside limited even on dovish ECB - RBS
FXStreet (Bali) - According to Greg Gibbs, FX Strategist at RBS, EUR should continue to perform resilient post the ECB outcome later today.
Key Quotes
"The market may be expecting some dovish noises from the ECB, and can see some possible steps, although favours no action at this meeting. RBS is calling for a cut in the refi rate to 10bp from 25bp. But this would largely be to counter the modest rise in cash rates as the excess liquidity in the system (ECB balance sheet) has dwindled as banks have steadily paid back emergency term loans under the LTRO programs."
"It is possible for the ECB to use other measures to attempt to ease policy. Ideas mooted included no longer sterilizing bonds purchased under the defunct emergency bond purchase program dubbed (SMP) which would immediately boost the balance sheet and increase excess liquidity again by EUR175bn."
"It could re-emphasise it has capacity to pursue negative interest rates or purchase bank loan assets in some form. It could introduce a harder form of forward guidance (even though the BoE and Fed appear to be struggling with their threshold-based guidance). A step too far, given the divisions and attitudes at the ECB, is implementing direct government bond purchases as currently employed by the BoJ and Fed."
"The ECB could make a dovish tilt that might weaken the EUR somewhat. However, it has struggled to find consensus on these steps that chip away at the ECB's claim not to monetize government debt and/or have other limiting features such as availability of suitable bank assets to buy and increasing dysfunction in money markets if rates are pushed below zero. As such, the capacity of the ECB to deliver sufficient policy easing to a counter deflation risks remains in doubt."
"This inability to ease policy has tended to boost the EUR (by increasing potential real yields). European economies have continued to recover even as inflation has fallen faster than expected, and thus its recovery feels resilient. The market is not convinced that low inflation may spill over into weaker demand and derail the recovery. This may make the ECB reluctant to take aggressive easing steps."
"Confidence in the Eurozone is also apparent in stronger periphery debt markets. Greece yields fell back sharply further overnight with un-attributed official comments that the EU may further extend and ease the terms of the Greek bailout in April/May. As such, the EUR should continue to hold up and be seen as a relatively safe currency."
Key Quotes
"The market may be expecting some dovish noises from the ECB, and can see some possible steps, although favours no action at this meeting. RBS is calling for a cut in the refi rate to 10bp from 25bp. But this would largely be to counter the modest rise in cash rates as the excess liquidity in the system (ECB balance sheet) has dwindled as banks have steadily paid back emergency term loans under the LTRO programs."
"It is possible for the ECB to use other measures to attempt to ease policy. Ideas mooted included no longer sterilizing bonds purchased under the defunct emergency bond purchase program dubbed (SMP) which would immediately boost the balance sheet and increase excess liquidity again by EUR175bn."
"It could re-emphasise it has capacity to pursue negative interest rates or purchase bank loan assets in some form. It could introduce a harder form of forward guidance (even though the BoE and Fed appear to be struggling with their threshold-based guidance). A step too far, given the divisions and attitudes at the ECB, is implementing direct government bond purchases as currently employed by the BoJ and Fed."
"The ECB could make a dovish tilt that might weaken the EUR somewhat. However, it has struggled to find consensus on these steps that chip away at the ECB's claim not to monetize government debt and/or have other limiting features such as availability of suitable bank assets to buy and increasing dysfunction in money markets if rates are pushed below zero. As such, the capacity of the ECB to deliver sufficient policy easing to a counter deflation risks remains in doubt."
"This inability to ease policy has tended to boost the EUR (by increasing potential real yields). European economies have continued to recover even as inflation has fallen faster than expected, and thus its recovery feels resilient. The market is not convinced that low inflation may spill over into weaker demand and derail the recovery. This may make the ECB reluctant to take aggressive easing steps."
"Confidence in the Eurozone is also apparent in stronger periphery debt markets. Greece yields fell back sharply further overnight with un-attributed official comments that the EU may further extend and ease the terms of the Greek bailout in April/May. As such, the EUR should continue to hold up and be seen as a relatively safe currency."