ECB announcement means Euro will reverse all loses in next trading session

5th June 2014

ECB Monetary Policy Statement – 05/06/14

Instead of choosing between a range of liquidity operations to back-up rate cuts, the ECB has effectively chosen all of them. Draghi affectively announced that he will throw more than €565 billion at Eurozone money markets to stimulate credit and get money flowing. The arsenal of measures proposed will flood the European banking system with funding supply, but they still haven’t addressed the question of demand.

In response to questions, Draghi admitted the interest rates are now technically at their lower bond, meaning he has exhausted conventional policy. However, he did suggest the possibility of ‘unconventional instruments’ should a prolonged period of low inflation persist.

The only thing left for the ECB to do is large scale asset purchases, and given Draghi’s glowing write-up of the Asset Backed Securities markets for SME loans, any sovereign QE similar to that of the Fed and the Bank of England is unlikely.

The outlook for the Euro is unchanged and negative deposit rates will have a marginal depreciation effect on the Euro, as banks with access to other central bank deposit facilities will repatriate funds using cross currency swaps. The ECB has merely thrown liquidity at the problem but failed to address the European banking system’s broken transmission mechanism. Banks will continue to deleverage in the face of increased regulatory scrutiny.

The Euro will most likely reverse all losses within the next trading session and move back to levels around $1.37 – $1.38 within the next few weeks, as traders take profit and close out Euro short positions.