The Euro Surprises As It Rebounds To Trade Near 1.13

The ECB announced today a broad package of extra stimulus measures: repo & depo rate cut, lower rate on the marginal lending facility, more & broader asset purchases and a series of new TLTRO’s. The announcement of the ECB actions pushed European shares up to 3% higher, but gains were soon reversed. Currently, most European indices gain approximately 1%. US Equities opened slightly higher as the lower oil price overshadows bold ECB action.

The central bank cut all policy rates, boosted its QE-program and announced a new round of TLTRO’s. More specifically the ECB cut its refi rate and marginal lending rate by 5 bps to 0% and 0.25% respectively. They lowered the deposit rate by 10 bps to -0.40%. The pace of monthly QE-purchases increased from €60B/month to €80B/month and investment-grade, non-bank, corporate bonds became eligible. On top, the ECB raised the issue limit from 33% to 50%. A new series of four targeted longer-term refinancing operations, each with a maturity of four years, will start in June 2016. Borrowing conditions in these operations happen at the repo-rate (0%), but can be as low as the interest rate on the deposit facility if banks lend out more than the standard the ECB defines!! Between the announcement of the easing measures and ECB president’s Draghi press conference, the euro traded volatile but eventually traded with an upward bias.

The ECB policy decision was the dominant factor for currency trading. Immediately after the policy announcement, European bond yields and the euro declined substantially. However, this decline was reversed as the ECB president said he didn’t see a need for further rate cuts. EUR/USD rebounded and trades currently in the 1.1040 area, substantially higher compared to the levels just before the policy announcement. USD/JPY was supported by a post-ECB risk-on rally, but the pair also returned part of the initial gains. The pair trades currently in the 113.70 area.

With no UK eco data on the agenda, sterling trading was also more or less paralyzed going into the ECB policy decision. EUR/GBP hovered in the low 0.77 area. Cable held a tight range near 1.42.

The EUR/USD swings after the ECB policy decision also filtered through into cable and EUR/GBP. Both cross rates initially declined. Cable tested the 1.4120 area. EUR/GBP dropped temporary below the 0.7690 support area and filled bids in the 0.7652 area. However, the declines in cable and EUR/GBP were also reversed after the ‘no need’ comment of Draghi. EUR/GBP trades now higher on a daily basis, at around 0.7755. Cable trades in the 1.4215 area.

Looking past the ECB, Germany reported a lower trade balance, mainly reflecting weaker exports, while France reported a bigger than forecast 1.3% rise in industrial production. China reported a higher than expected rise in February inflation – up 2.3% in the year, from +1.8% in January – on higher food costs likely related to the New Year Chinese equities fell as demand from state sponsored entities reportedly fell. We don’t think higher inflation will curb the trend towards monetary accommodation, however. The CNY remains basically stable – very much in line with the desire of the local monetary authorities.

The Japanese yen traded soft, down a modest 0.2% with the bulk of its Asian session decline spurred by risk appetite in response to data from China. Sentiment continues to provide for the bulk of movement in JPY as we consider its ongoing divergence to typical fundamental drivers such as yield spreads.