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ECB signals a rate cut, sends the euro to a 2-month low - CNBC

JULY 25, 2019
  • The central bank said it expects its key interest rates to remain “at their present or lower levels” at least through the first half of 2020.
  • This is an update on the wording in previous statements and suggests a rate cut could be on the horizon.

ECB President Draghi Announces Rates Decision

Mario Draghi, president of the European Central Bank (ECB).

Bloomberg | Bloomberg | Getty Images

The European Central Bank (ECB) kept rates unchanged but altered its forward guidance on Thursday amid deteriorating economic data in the euro zone.

The central bank said it expects its key interest rates to remain “at their present or lower levels” at least through the first half of 2020, updating the wording on previous statements and suggesting a rate cut could be on the horizon.

The bank also signaled that there could be additional measures to stimulate the euro zone economy. It said it was examining options, “including ways to reinforce its forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases.”

Potential new net asset purchases suggest the central bank could reintroduce its quantitative easing program, where it purchases government bonds from euro zone countries to further stimulate lending and stoke inflation.

On Thursday, the euro zone central bank kept the rates on its main refinancing operations, marginal lending facility and deposit facility unchanged at 0%, 0.25% and -0.40%, respectively. These have been at record lows following the euro sovereign debt crisis of 2011.

Graph Euro Post ECB decisions

Euro fell to an eight-week law after ECB decision.

Traders are now waiting to hear from President Mario Draghi, who is due to speak at 1:30 p.m. London time.

Sintra speech

Draghi warned last month that without a clear improvement for the euro zone economy, the central bank would announce further stimulus measures. This caused market players to up their forecasts for new interest rate cuts or even a bond-buying program. Draghi, speaking in June in Sintra, Portugal, made it clear that his institution was ready to use all necessary measures to revamp the flagging economy.

Data out Wednesday further highlighted the recent weakness, showing German manufacturing PMIs (Purchasing Managers’ Index) falling to 43.1 in July from 45.0 in June. At the same time, new orders in the country dropped at their fastest pace since July 2012, on the back of weakness in Chinese demand and in the auto sector.

The ECB had embarked on a major stimulus package following the sovereign debt crisis of 2011. This included cutting interest rates to record lows, purchasing government bonds and facilitating more lending to euro zone banks. The bank tried to normalize its policy last year — and catch up with other central banks like the U.S. Federal Reserve — but with global trade wars and softness in China most of these banks have now signaled a U-turn. In the U.S., investors now believe there’s an 80% chance that the Fed announces a 25 basis point cut when it meets next week.

Trump Wants a Weak Currency. Rivals Do Too, and That’s a Problem - BLOOMBERG

JULY 25, 2019

By  and 

  • Fed rate cuts may not weaken dollar amid global dovishness

  • Any intervention could face strong countermeasures by rivals

Despite the Fed’s increasing dovishness, the greenback has beaten most Group-of-10 peers this quarter.

Despite the Fed’s increasing dovishness, the greenback has beaten most Group-of-10 peers this quarter.

 Photographer: Paul Yeung/Bloomberg

 

Major economies around the globe all seem to covet a weaker currency as risks to growth mount. That makes engineering a lower dollar, euro or other heavyweight all the harder.

President Donald Trump has repeatedly badgered the Federal Reserve to cut rates and complained that the U.S. dollar is too strong. But he’s got competition. It might not mention the exchange rate explicitly, but the European Central Bank is poised to loosen policy, weighing on the common currency.

Bank of Japan Governor Haruhiko Kuroda said the bank will “persistently continue with powerful monetary easing” to boost inflation. In China, the central bank looks set to step up stimulus to revive growth.

Thanks to synchronized monetary easing, any simultaneous moves to weaken currencies might cancel each other out -- making beggar-thy-name policies a waste of time.

“Everyone is sort of pushing on the same piece of string,” said Charles Diebel, head of fixed income at Mediolanum Asset Management. “If you have the Fed easing and the ECB easing, it’s just a relative game. It’s very hard for currency volatility to remain elevated.”

2010 Redux

Despite the Fed’s increasing dovishness, the greenback has beaten most Group-of-10 peers this quarter. The Bank of Korea surprised markets with a rate cut last week, but the won only weakened briefly. Even though the Swiss National Bank keeps reiterating it has leeway to ease, the franc continues to be buoyant against the euro.

Foreign-exchange strategists say the risk of a U.S. move to weaken the dollar has risen after Treasury Secretary Steven Mnuchin said last week that there’s no change in the nation’s currency policy “as of now.”

Real Effective Exchange Rate

Dollar is most expensive G-10 currency.

Welcome to the latest race to the bottom. In 2010, when major central banks were printing money and cutting rates, causing their exchange rates to fall, then-Brazilian Finance Minister Guido Mantega famously labeled it a “currency war.” The difference is that back then, the dollar was falling and other countries tried to catch up with it.

Now, the greenback is among the most overvalued G-10 currencies, according to a Bank for International Settlements model on real effective exchange rates.

A desire among policy makers to expand their toolkit to prop up growth is understandable. The International Monetary Fund has revised down its growth forecast for 2019 repeatedly -- including on Tuesday -- as trade and geopolitical tensions threatened to damp the world economy. Major central banks, including those in Switzerland and Australia, are sticking to a low-rates policy.

Monetary Struggle

“If the U.S. wants a weaker dollar now, they are going to struggle to get that with just the use of monetary policy,” said Kit Juckes, a strategist at Societe Generale SA. “Fed policy is no longer the driver of the dollar -- growth is. A rate cut by the Fed isn’t going to get the euro stronger if the prospect of growth there is weak.”

Any competitive devaluations are naturally fraught with political tensions, while prolonged low interest rates risk asset bubbles and financial repression.

See it as a U.S.-Europe story, according to Stephen Jen, the chief executive officer of Eurizon SLJ Capital. He reckons the BOJ has already done so much easing that it is now worried about the economic effects of sustained negative rates. Meanwhile, the People’s Bank of China may refrain from enacting a large stimulus amid fears it could destabilize the economy over the long haul.

“It’s really the euro and the dollar racing lower,” Jen said in an interview. “The Fed doesn’t really have a strong case to cut at all as the U.S. economy is doing fine. The real issues are happening outside the U.S. That’s a very different situation than the Europeans face. They are facing weakness right there in Germany.”

Markets expect the Fed to announce a 25-basis-point cut in interest rates next week. Despite that, the euro depreciated 1.7% against the dollar this quarter, and is down 2.5% this year.

It’s unlikely that the U.S. would intervene partly because it risks triggering counter-measures by other monetary authorities, said Bilal Hafeez, former head of G10 foreign-exchange and rates strategy at Nomura Holdings Inc. and now the CEO of Macro Hive.

“What’s more likely is that the Fed would cut rates more aggressively” said Hafeez. “But the extent of dollar weakness will be limited because other central banks are becoming more dovish.”

(Adds latest IMF forecast reduction in 10th paragraph.)

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