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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