Forex Institutional Research: Credit Agricole FX Daily
Key quotes from the report:
EUR Ahead of The ECB
The topic of persistent disinflation on the back of ongoing global currency war will likely feature prominently at today’s ECB meeting. With the Eurozone inflation expectations close to record lows and the outlook for the economy still rather dim, investors are already expecting some easing to come from Draghi and his colleagues. Indeed, reading through the various previews ahead of the March ECB meeting what is striking is the sheer number of policy measures that are expected to be announced by the Governing Council.
These measures include a deposit (and a main refi) rate cut, an increase in the duration and the pace of its QE, a change in the TLTRO conditions and even new LTRO funding as well as policies to prop up the Eurozone banking sector like tiering of the negative depo rate and purchases of bad bank loans underwritten by the respective national treasuries. The CA economists seem to be at the conservative end of the estimates’ spectrum with a two-tier depo rate cut, an extension of the duration of the QE program and an easing of the TLTRO conditions expected.
Despite the barrage of ECB policies that could be heading our way, so far there has been a fairly muted reaction in the FX and other markets. We suspect that the uncertainty ahead of the meeting is playing a role not the least given the length of the market’s ‘wish list’. More importantly, however, there is little in that list that is new. If Draghi were to deliver (a lot) more of the same, the market participants could still find the outcome underwhelming especially given that the ECB’s efforts to revive growth and boost inflation in the Eurozone have failed so far.
From an FX point of view, there doesn’t seem to be much conviction to sell EUR especially given the way markets responded to ‘more of the same’ policies by the Riksbank. Another depo rate cut could also fuel fears about escalating currency wars and weigh on investor risk sentiment in a repeat of the market price action in the wake of the BoJ’s depo rate cut in January.
The interesting questions therefore are:
1. Whether the ECB can surprise at all?, and
2. Will this constitute a EUR-negative outcome? We think that the answer to both questions should be yes.
In particular, we think that the addition of measures to help prop up the Eurozone banking sector could allow the ECB to deliver more aggressive easing. For example, a potential tiering applied to the penalty rates should allow deeper cuts into negative territory while an expansion of the bad bank loan purchases to more Eurozone member states could ultimately boost banks’ appetite for TLTRO and/or a new LTRO funding. All that could help improve the Eurozone liquidity conditions and, together with more QE for longer could support the Eurozone
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