WWDD Next? (What Would ECB Draghi Do Next?)

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:

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  • On May 2, 2013 ECB Press Conference, ECB Draghi stated that ECB is “technically prepared” for negative deposit rate, and that ECB has an open mind in regards to negative deposit rates.  But if they were to act on the Deposit Rates, they will have to address the unintended consequences.
  • On May 3, 2013 ECB Nowotny (Austria) stated that ECB Draghi’s comments on possible negative interest rates have been over-interpreted, there are no concrete plans to cut the deposit rate into negative territory at this point in his CNBC interview.  He then added that no major central bank has ever had a negative deposit rate and any move into negative deposit rates territory must be analyzed and discussed in more detail.
  • On May 13, 2013 ECB Visco (Italy) stated that ECB could cut Deposit Rate into negative territory if economy needed further help; personally believe that such a move would be effective. However, he also reiterated that the move could have unintended consequences but central bank knows how to work on that.  He concluded that ECB is technically prepared to cut deposit rate below zero.
  • On May 29, 2013 ECB Constancio (Portugal) stated that ECB is logistically prepared for negative deposit rates, but no decision made yet; Banks would need advanced notice about negative deposit rates to prepare themselves.

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:

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Deposit rate cut may not give the desired boost to SMEs (small and medium enterprises) and some members don’t believe the central bank can help SME credit; Negative interest rate may not support further credit expansion or loans to SMEs

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.

 

Thanks,

 

henry-sig

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About Henry Liu

My name is Henry Liu and I am a Forex Trader and Mentor. I help traders achieve consistent income trading Forex while spending less time trading. My focus in trading is a combination of Fundamental Analysis, Technical Analysis, and Market Sentiment. Far too many retail Forex traders concentrate on just one aspect of trading, technical analysis, and ignore everything else; it is my goal (and vision) to educate every trader on how to take advantage of news trading and become more balanced traders.

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