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ECB slashed deposit rate by only 10bps, Press conference in focus - TDS

FXStreet (Delhi) – Research Team at TDS, notes that the ECB cut the deposit rate 10bps to -0.30%, leaving the other interest rates unchanged and a note that further measures will be announced at the press conference.

Key Quotes

“While most of consensus expected on a 10bps cut, the market was priced for more so this starts off the day with a disappointment. This comes in spite of some initial excitement as an FT article was erroneously published 15 minutes ahead of time reporting that all rates had been left unchanged.”

“The reason to limit disappointment here is the speculation that the ECB could introduce a two-tiered system, so it is possible they announce some sort of lower, lower bound below this. That would help to reverse the disappointment we have seen, but short of that, the ECB now needs to be especially aggressive on QE (likely at least €20bn more per month and open-ended, or clear commitment to cut rates further) if the EUR is going to trade lower from this disappointment.”

The Rest of the Day From Here

“As usual, we will have the Opening Statement at 1:30 GMT followed by the Q&A. Trading the ECB shows the flow we expect in FX. Overall, we still see downside today but it is important to remember the context that the ECB in January went from 0 to 60 (billion of QE). Today is about a marginal acceleration across easing measures beyond there.

The flow of information in terms of what we expect first, second, etc and trigger words to follow from this point are:

QE Augmentation/Extension: We look for an augmentation from €60bn to €70-75/month until at least March 2017, but more likely leaving the end-date open-ended. As long as there is €70bn and a six month extension, the market should be placated. But more than that will fuel more EURUSD downside and outperformance of the 5y sector.

Asset purchase broadening: The ECB may have to broaden out buying to other assets, with some of the muni/regional debt cited as a potential. Outside off the differential credit impact, this should have little broader influence on the market.

New LTRO/TLTRO: Right now, TLTROs are offered quarterly through June 2016 at refi+10bps with everything maturing in Sep 2018. Given the ECB likes to use LTROs/TLTROs as their soft forward guidance tool, these could change. Anything that offers TLTROs into 2017 will be a good signal for reds/greens/blues Euribor to rally further from where they started the day. And don’t discount the chance the ECB thinks about offering a negative rate LTRO/TLTRO to show they are further trying to improve lending.

Capital key changes: Like the asset purchase broadening, this is more about the ECB trying to increase the pool of assets they can buy. If they leave this alone, there is no impact on the market. If they change to using market cap weightings, then Benelux and periphery can outperform, which is likely more beneficial to broader credit and risk sentiment. But has little influence directly on FX.

Tiered deposit rate: It isn’t clear what structure this will have. But two-sided risks as the structure could imply some short-term upward pressure on Eonia to adjust to a new liquidity structure. But we need to know these details to know where the lower bound will effectively trade.

Signalling more rate cuts: If Draghi continues to reference “all the available instruments” than it means they aren’t don’t cutting rates so rates markets can take another leg lower.

Forecasts: Everything should be cut to some degree for inflation (0.1/1.1/1.7 for 15/16/17) and GDP forecasts (1.4/1.7/1.8). Focus on 2017 CPI forecast. If that is cut to 1.5% or lower, than the ECB still has a low hurdle to do more.

Q&A: All the fireworks should be over by here. So if he pre-commits one way or the other, that is market moving. Otherwise, this should be all FAQ-based and collateral moves in the market depending on what levels have been taken out.”

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