What would ECB Draghi do next in the upcoming ECB Meeting?
Will he surprise the market and launch negative deposit rates in order to boost recovery? Well, that’s the question, isn’t it? Before we answer that, let’s take a look at some background information:
How to interpret these comments?
Ever since the very mention of “negative deposit rates” by Draghi, market has been selling off the Euro. With various ECB members reiterating time and time again that ECB is “prepared”, it’s no wonder why EURUSD has been trading below the 1.3000 level for the better part of May. But a closer look at this option reveals that ECB Draghi is highly unlikely to go ahead with it, not only because of the “unintended” consequences, nor the fact that no major economies have ever adopted negative rates, but because of the fact that the move may not produce the “intended” effects, as stated in today’s discussion within the ranks of ECB:
In short, negative deposit rates is similar to OMT, as they are both deterrents, and nothing more. As a matter of fact, ECB probably never intended to implement it, but just having it hanging over the market is enough, as we’ve seen in the volatility of the EURUSD pair lately. Furthermore, today’s comments from ECB members’ discussion confirmed that “Public discussion of negative rates was a means of showing the ECB still has firepower“, and once again underlined the impracticability of the idea.
So moving forward to the upcoming ECB Press Conference on Thursday the 6th of June, I fully expect ECB to keep up with the facade and try to manipulate the market to keep thinking that negative deposit rate is a viable option, but at the end of the day, with the potential of worse than expected news (PMIs and NFP) out of U.S., I believe EURUSD could once again pick up momentum and push to the 1.3300 level. After all, Draghi himself have confirmed that Eurozone economy has been showing signs of stabilization and growth will take place during the second half of 2013.
Or simply, I’ll look to buy EURUSD on dips.
WWDD Next? (What Would ECB Draghi Do Next?)
June 4, 2013 by Leave a Comment