ECB likely to sit on its collective hands once again


While some ECB members wanted a rate cut last month, the central bank isn’t expected to budge, say Michael Derks of FxPro. Some tentative positive signs and a fear of triggering unnecessary uncertainty could hold it back.

In the interview below, Derks also discusses the debt ceiling crisis (which could be far worse than the fiscal cliff one), the FOMC minutes mini-storm, the direction of rates in the land down under, and more.

Michael joined FxPro in May 2010 having been previously at Deutsche Bank, Rothschild and Schroders. He is a multi-discipline investment and market strategist/economist with extensive expertise in FX, strategic and tactical asset allocation, fixed income, equities, property and alternative assets. An accomplished economic and investment writer and researcher, Michael holds a Bachelor of Economics degree from Macquarie University in Sydney.

1. Could the ECB announce a negative deposit rate in the upcoming or in the next rate decision, or will Draghi keep the ammunition dry?

There is bound to be another discussion regarding the necessity for a rate cut at this week’s meeting of the ECB’s Governing Council, just as there was last month. It turns out that a majority of policy-makers were open to the need to reduce the benchmark rate but opted against it amidst fears that it could trigger unnecessary uncertainty. All things considered, the Governing Council is likely to sit on its collective hands once more, in part because a rate reduction would not achieve very much. Also, there are some tentative signs that the eurozone economy is stabilising. For now, the ECB is likely to persevere with unconventional monetary policy measures, in an endeavour to normalise the transmission channel for conventional monetary policy.

2. The fiscal cliff presented a partial solution and rating agencies haven’t praised this deal. Could we see another credit rating downgrade if there is no grand bargain at the end of February? How will a potential downgrade impact currencies?

In the first instance, it is worth pointing out that prevention of the fiscal cliff was always going to be much easier than the next part, namely raising the debt ceiling. Having given in to Obama on the tax debate, Republicans will be utterly determined to make good on their demand that spending cuts need to match the debt ceiling increase dollar-for-dollar. The acrimony between the GOP and the Democrats is extremely pronounced – as a result, the debate about the debt ceiling will likely get very ugly and fractious which periodically could hurt asset markets and the dollar. Also, credit rating agencies will likely take a very dim view should the partisanship and brinkmanship evident in the mid-2011 debt ceiling discussions re-emerge.

3. Some members of the FOMC wish to withdraw some of the monetary stimuli at the end of 2013. Does this publication present a shift in how the dollar reacts to US indicators, from risk-on/risk-off back to straightforward reactions?

Although the news that some FOMC members were of a more hawkish disposition helped the dollar last week, it is very likely that this is merely a storm in a teacup. This group of FOMC hawks largely consists of regional Fed presidents. Also, in 2013 two fresh regional Fed presidents get the vote and both are of a more dovish persuasion. In recent months, risk-on/risk-off trades have faded as a key driver of direction for the major currencies, and this will likely continue to be the case in upcoming months.

4. The yen has dropped quite a bit, with Japanese officials and exporters cheering. At what point could Japan’s trade partners show some opposition to this ‘currency war’?

Asian policy officials broadly accept that Japan’s yen has been extremely overvalued for a lengthy period, and that this over-valuation has weighed heavily on the economy. Not even massive intervention or prolonged asset purchases were able to weaken the currency in any material way, such was the sustained demand for the perceived safe-haven properties of the Japanese currency. However, perceptions have shifted markedly – the yen is now seen as an inferior safe-haven to the dollar, risk appetite has improved which has triggered a rush to remove capital from the yen and deploy it in risk assets and finally the economy desperately requires a weaker currency. Also, China and its satellite economies in Asia have gone on something of a buyers’ strike with respect to Japanese goods in response to political tensions between Asia’s two superpowers.

5. The interest rate in Australia is at the post crisis lows of 3%. Could the RBA cut below this level in upcoming months?

There is a very strong likelihood that interest rates down under will decline in coming months. The RBA would like a weaker currency because the AUD is currently very expensive and is hurting the economy. It would not be surprising if the RBA lowered the cash rate to 2% over 2013.

Further reading: See the previous interview with Michael Derks

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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.


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