ECB Steps Up “In a Big Way”
What a morning it has been in the forex market! The EURUSD shot above 1.32 after the EuropeanCentral Bank (ECB) rate decision, but sold off aggressively when ECB President Mario Draghi said the Bank has an "open mind on negative deposit rates."
Before the rate decision, we said that a rate cut alone would not kill the euro rally, and instead, the ECB needed to be willing to do more. Draghi wasn't messing around when he said that "all options are open" and that the "ECB stands ready to act if needed."
The central bank delivered in a very big way today by cutting the main refinancing rate by 25 basis points (bps), the lending rate by 50 bps, and extending their fixed rate allotment until July of next year. The Bank’s willingness to consider negative deposit rates was just icing on the cake.
Based on the ECB's actions today and the number of times Draghi used the word “weaker” in his introductory statement, the central bank is very worried about the outlook for the Eurozone economy and lack of lending.
More specifically, Draghi pointed to weak labor market conditions and short-term indicators as reasons why easier monetary policy was needed. He also said weak growth has now expanded beyond the periphery and is now affecting core Eurozone economies. With inflationary pressures declining on the back of lower price pressures, now was the perfect time for the ECB to ease.
The central bank did a great job preparing the market for changing policies before the announcement, and as a result, the rate cut alone did not hurt the euro much. Instead, expectations for future monetary policy actions killed the euro rally because this is not a “one and done” scenario, according to Draghi.
In the long run, the measures taken today will provide underlying support for the Eurozone, but given how low rates have been for the past few months, we are skeptical about how much real impact it will have on the economy.
See also: Why an ECB Rate Cut May Not Work
US Data Surprises Ahead of Friday’s NFP Report
Aside from the euro, USDJPY is also on the move today. Investors initially drove the currency pair above 98 while EURJPY was being bought, but Draghi's comment about negative rates also sapped the rally in USDJPY. The pullback, however, was not as deep because the dollar was supported by better-than-expected US data.
US jobless claims dropped to 324K this week, the lowest level in more than five years. Continuing claims edged higher, although the increase was small. The US trade deficit also narrowed by 11%, from -$43.6B to -$38.8B.
We are finally seeing some good news about the US economy, and this should keep the dollar supported on a day when the ECB not only cut interest rates, but also said it is open to further easing, if necessary. US non-farm payrolls (NFPs) are scheduled for release on Friday, and jobless claims have been consistent with an uptick in job growth.
By Kathy Lien of BK Asset Management