By Vicki Schmelzer
NEW YORK (MNI) – A somewhat unexpected European Central Bank cut
served to underpin the euro, as well as risk sentiment Thursday,
although the feel-good effect may not last long depending on how events
unfold in Greece, analysts said.
Even if the most immediate peripheral concerns are soon resolved,
there are so many other lingering issues that may prevent a larger euro
or larger risk rally, they said.
The ECB lowered the minimum refi rate by 25 basis points earlier,
catching the market off guard, to a degree.
Most players expected new ECB President Mario Draghi to signal a
rate cut for December, not for the ECB to cut rates this month.
In addition to the key refi rate, now, 1.25%, the ECB also said it
was cutting its marginal lending rate by 25 basis points to 2.0% and its
deposit rate by the same magnitude to 0.5%.
By decreasing all three rates by the same amount, the ECB leaves
its corridor — the spread between the deposit rate and the marginal
lending rate — unchanged at 150 basis points.
In both the introductory statement and press conference that
followed, Draghi explained that the decision was based on shifting
(lower) growth expectations and to maintain price stability.
“In the Governing Councils assessment, the downside risks to the
economic outlook for the euro area are confirmed in an environment of
particularly high uncertainty,” the introductory statement said.
“Downside risks notably relate to a further intensification of the
tensions in some segments of the financial markets in the euro area and
at the global level, as well as to the potential for these pressures to
further spill over into the euro area real economy. They also relate to
the impact of the still high energy prices, protectionist pressures and
the possibility of a disorderly correction of global imbalances,” the
statement continued.
In Q&A, in the wake of 10-year Spanish and Italian bonds hitting
record wides over German Bunds this week, Draghi was asked whether this
peripheral spread widening was a concern.
Taking a big picture approach, he noted that in the past, spreads
between the peripherals and Bunds “didn’t reflect the different
realities of the different countries.”
If, in the past, spreads undershot (spreads too narrow), than there
was the prospect that spreads could widen also at some point.
“We may now have overshooting,” Draghi said.
He viewed spread widening in general as a positive development as
it implies that market analysis is now “more perceptive of the different
risks in different countries.”
As for continued ECB buying of peripheral bonds, Draghi stressed
that member countries seeing spread widening should not always count on
“external help” and should instead “implement the right policies” that
would allow spreads to contract.
On the FX front, the euro took comfort ultimately from the ECB’s
pro-growth action, although initially the pair saw widespread selling.
The euro was trading at $1.3822 in afternoon action, on the high
side of the day’s range of $1.3654 to $1.3834 (low/high seen pre-ECB)
range.
The pair is seen as contained by solid support around $1.3850 (need
a decisive break below $1.3565, the 61.8% Fibonacci retract of the
October advance), and initial resistance at $1.3850 (the 55-day moving
average), for now, traders said.
Any rallies over $1.4000, will likely see solid selling interest,
they said.
“The situation in Greece and the other peripherals is not going to
be resolved any time soon,” is the thinking, explained John McCarthy,
director of foreign exchange at ING Capital Market.
The low $1.40 levels “will likely offer resistance” for the euro,
“based on the fact that there is too much uncertainty,” he said.
A push above the 55-day, would likely target $1.4000, and perhaps
even last week’s highs around $1.4245-50, but it will be hard for the
euro to gain upward momentum.
Already, people have been wondering “why we were up there in the
first place,” McCarthy said.
“Anywhere towards $1.4200 there will be plenty of natural sellers,”
he said.
In the wake of Thursday’s ECB cut, Steve Barrow, senior currency
strategist at Standard Bank, looked for the euro to press higher in the
short-term, but maintained his 12-month forecast of $1.2500 also.
With so many peripheral issues unanswered, “no one, who takes a
view, wants to buy the euro,” he said.
That leaves euro demand to global central banks and banks (likely
Eurozone) who are looking to unload dollars for diversification or other
purposes.
“People aren’t buying the euro because they like it, but because
they have to,” Barrow observed.
He looked for the ECB to deliver another 25 basis point rate cut in
December and saw scope for the minimum refi rate to be lowered to around
0.50% if Eurozone growth prospects don’t improve quickly.
“I am not sure that 1.0% will be the base, but the ECB may think
that,” Barrow said.
Market focus is not solely on monetary policy easing, he said.
“The underlying issue is – does the ECB have to go much further
(additional peripheral bond buys) than cutting rates,” Barrow said.
Draghi was repeatedly asked if the ECB would be the “buyer of last
resort” for peripheral bonds, with one reporter suggesting the central
bank was at the peripherals’ mercy.
“We are not forced by anyone,” Draghi responded, stressing that the
ECB made its own assessment of the situation before acting.
** Market News International New York Newsroom: 212-669-6430 **
[TOPICS: MN$FX$,M$X$$$,M$Y$$$,M$$EC$]
