MacroScope

Draghi tries to keep show on the road

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The European Central Bank has one of its two offsite policy meetings of the year, in Naples. After a glut of measures last time it’s inconceivable that further action will be taken now but there is plenty to ponder.

A first tranche of cheap four-year loans has been offered to banks in the hope they will lend it on but the take-up was poor. The ECB is playing up the prospects of a second round in December after bank stress tests are out of the way. But having pledged to add the best part of 1 trillion euros to its balance sheet to rev up the euro zone economy, there is a lot of ground to cover.

Draghi will flesh out the ECB’s parallel plan to buy bundled-up loans – asset-backed securities – which has already been viewed with disquiet by Bundesbank chief Jens Weidmann. That may be heightened by the realisation that if the ECB is to open the offer to banks across the euro zone, it may have to take in some rather dicey looking collateral from the likes of Greece and Cyprus.

A Reuters poll on Monday showed money market traders on average expect the ECB to buy a total of 200 billion euros of ABS and covered bonds over a year. Draghi has appealed to governments to support the plan by guaranteeing some riskier ABS tranches, but both France and Germany oppose that.

The ECB faces big political and philosophical hurdles to launching full quantitative easing. And there is now another reason to ponder whether it will take the ultimate step, which many in the markets assume is just a matter of time.

Euro falling but no impact on inflation yet

Lithuanian 1 euro coins are pictured in the Lithuanian Mint in Vilnius

Euro zone inflation figures are due and after Germany’s rate held steady at 0.8 percent the figure for the currency bloc as a whole could marginally exceed forecasts and hold at 0.4 percent.

One upside for the currency bloc is the falling euro which has broken below its 2013 lows and is down almost nine percent from the peak it hit against the dollar in May. With U.S. money printing about to end next month and speculation intensifying about the timing of a first interest rate rise from Washington, there are good reasons to think that this trend could continue.

If it does, it would push the prices of imports up while making it easier for euro zone countries to sell abroad which should have an upward impact on both growth and inflation. The impact won’t be instant, however, as today’s figures will demonstrate.

Euro needs the Fed, or QE, for the next leg down

EIt has become increasingly clear it takes a lot more than words to sink the euro.

The European Central Bank cut rates as low as they will go on Thursday and announced another round of cheap cash for banks, hoping the euro, which has helped knock down inflation in the fragile euro zone economy, will fall.

Yet the ECB’s efforts yielded little more than a lukewarm response from markets, suggesting that the only thing that will get the euro to fall any further in the very near-term is a change in the outlook for U.S. rates, and through that, a stronger dollar.

Strong euro may be a monster Draghi can’t tame

Mario Draghi, President of the European Central Bank (ECB), addresses the media during his monthly news conference at the ECB headquarters in FrankfurtECB President Mario Draghi may have created a monster when he declared nearly two years ago that he will do “whatever it takes” to save the euro.

Given that Draghi has now openly pegged the outlook for monetary policy at least partly to the exchange rate, the prospect of both short-term and long-term investors buying the euro is a worrying obstacle for policy.

A rampant euro is anathema to the ECB’s narrow mandate, which is aimed squarely at getting very low inflation back to its target of just below 2 percent. A stronger euro keeps a lid on the price of everything the euro zone imports from abroad. And it makes everything it exports seem relatively more expensive.

Prepare for a razor-thin rate cut from the ECB in June. But what will it achieve?

RTR3OBCB.jpgA consensus appears to be slowly building for a carpaccio-slice interest rate cut from the European Central Bank next month.

What is also becoming increasingly evident is that it wouldn’t do much good.

Through economic research notes with titles like “ECB likely to do something next month” (JP Morgan), “ECB comfortable about acting next month” (Barclays), “ECB to act!… next month… (very probably)” (Rabobank), you get the depth of just how reluctant this central bank is to do anything, for all the talk of being ready to act.

ECB still the major source of funding for banks

European Central Bank President Draghi smiles during the monthly ECB news conference in FrankfurtThe European Central Bank is still the main funding source for banks even if it is not acting as lender of last resort for governments in the currency bloc.

On Tuesday, banks took nearly 173 billion euros from the ECB at its weekly tender, the highest since June 2012 and well above a Reuters poll consensus of 130 billion euros.

The spike in actual allotment versus expectations is the highest in over a year. The amount maturing from last week was just shy of 122 billion.

Talking the talk

European Central Bank President Mario Draghi delivers a speech in Amsterdam which will fixate the markets following his recent statement that a stronger euro would prompt an easing of monetary policy.

Most notably via his Clint Eastwood-style “whatever it takes” declaration the best part of two years ago, Draghi has proved to be peerless in the art of verbal intervention. But even for him there is a law of diminishing returns which may require words to be backed up with action before long. 

In the 12 days since he put the euro firmly on the ECB’s agenda, the currency has actually weakened a little and certainly shied away from the $1.40 mark which many in the market see as a first red line for the euro zone’s central bank. That is probably because investors expect action from the ECB  soon and if so, there are good reasons to think they may be wide of the mark.

Euro will rally further, say the most accurate FX forecasters

The euro will rise even more, according to some of the top foreign exchange strategists who accurately predicted resilience in the common currency over the past year.

If it does, policymaking will get even tougher for Mario Draghi and the European Central Bank, who are already grappling with inflation at a four-year low and well below the bank’s target.

In 2013, the euro was the best performer among the majors, gaining almost five percent against the dollar, wrong-footing the consensus view in Reuters polls during that period.

Japan-style deflation in Europe getting harder to dismiss

To most people, the idea of falling prices sounds like a good thing. But it poses serious economic and financial risks – just ask the Japanese, who only now finally have the upper hand in a 20-year battle to drag their economy out of deflation.

That front is shifting westward, to the euro zone.

Deflation tempts consumers to postpone spending and businesses to delay investment because they expect prices to be lower in the future. This slows growth and puts upward pressure on unemployment. It also increases the real debt burden of debtors, from consumers to companies to governments.

In many ways, policymakers fear deflation more than inflation as it’s a more difficult spiral to exit. After all, interest rates can only go as low as zero and if that doesn’t kickstart spending, they’re in trouble. Again, just ask the Japanese.

Will rounding cents bring euro zone down?

The 18-country euro zone has had a rough ride in the past 6 years, and even with the glimmers of good news reaching the darkest corners of the debt crisis, the European Central Bank has been anything but ready to sound a crisis-over siren.

Right after ECB President Mario Draghi warned against undue optimism, the central bank has identified a new threat to the common currency’s integrity – rounding up or down small change.

Belgium plans to allow retailers to round 1 and 2-cent coins to the closest five cents, in a similar fashion as Finland and the Netherlands already do. But the ECB had harsh words against such going-it-alone moves, published in a legal opinion published on its Internet site.