Thursday, April 3, 2014

QE has entered the lexicon of the European Central Bank | 200k is the magic number

Yesterday (Is the Euro due for a hit today?) we suggested that the European Central Bank (ECB) might be about to consider a form of Quantitative Easing (QE) to tackle the threat of deflation in the Euro zone, as well as the relatively very high and chronic unemployment that exists outside of the core states of the EU.

Senor Draghi and his colleagues did not disappoint. While there was no change to policy in the announcement that preceded the press conference, the comments during it made it very clear that the Central Bank stands ready to introduce any and all measures that might be required, especially if inflation goes any lower, or even remains at its current low level for any period. Among others, no less a personage than the President of the IMF, Christine Lagarde, has expressed concern about low inflation in the Euro zone, not just the threat of deflation.

The most significant thing to emerge is that the term “Quantitative Easing” has now entered the vocabulary of the ECB governing council. That, all by itself, is new and noteworthy.

As well as further reducing interest rates from their currently historically low level and / or purchasing the sovereign bonds of member states, the ECB also has the capacity to place a negative value on the interest rate it pays on bank overnight deposits, which would have the effect of actually charging banks for the privilege of leaving spare money on overnight deposit. When overnight rates were reduced to zero, last year, the knee jerk reaction of the Forex market resulted a dramatic lowering of the Euro on the day.

But bringing in negative deposit rates could be calculated to make banks think twice about using the facility, and lend the money to businesses and individuals instead. This would result in an upward pressure on the inflation rate. It would also tend to weaken the Euro, just as the EURUSD pair responded yesterday in the manner we had anticipated as a result of the press conference remarks.

The magic number is 200k

All attention today will be on the official Non-Farm Payrolls report from the USA, due out at 1:30 PM GMT. Although the Fed has declared that it will be looking at many other measures of the strength of the economy when decided on policy, the employment figures must remain of paramount importance.

In the good old days, prior to the Global Financial Crisis, the monthly figure for the creation of new jobs stateside was always in excess of 200,000. Most market participants remember that and anything below that number today will tend to prolong a lingering doubt about economic recovery.

We will not be entering any new positions until it becomes clear what the figure is today, and the market’s reaction to it.

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