When you consider the fact that the U.S. and Britain is slowly moving towards monetary tightening, while in the euro zone all the time on the table is loosening, we should expect a depreciation of the euro against most other currencies. But this did not happen, and that's because after the ECB cut rates in November, quite unintentionally quickly tightened policy. This unintended change is a side effect of taking over of supervision by the ECB over large banks in the area and the associated stress tests. The tests which lead banks to improve capital adequacy ratios, within which, inter alia, They repay the loan LTRO. The result is a significant decrease in excess liquidity, which made it a de facto in the euro area for many months base rate was equal to 0% deposit rate.
Banks have to decide whether the excess money to put on the market, or to deposit at a rate of 0% in the ECB. Now, when the surplus disappeared, again took the lead role refinancing rate, which in November, the ECB lowered to 0.25%. As a result, market interest grew, attracting capital into euros. Thus, if the euro is to be discounted, the ECB must affect market rates.
After the conference,
The ECB did not lower interest rates, it also not decided on another form of monetary loosening. Moreover, the ECB's CEO suggest that reductions probably will not be. Euro appreciation against the U.S. dollar reacted.
The recovery in the euro area continues to be slow, and inflation remains low. Nevertheless, the ECB already knew and that is why, among other things, lowered the reference rate in November. Since then president Mario Draghi maintains that it is ready to act, but in two cases: if the expected future inflation will be lower than assumed so far by the Bank, or if the decline in market liquidity will lead to a significant tightening by the increase of market interest rates.
A month ago, Draghi indicated that the March meeting will be very important, because the Council of the Bank will be the first time she had available inflation projections for 2016. This projection assumes an increase of inflation from the current 0.8% to just over 1% at the end of 2014, to 1.3% in 2015 and 1.5% in 2016, while in the last quarter of 2016 years will be a already 1.7%.
Projection confirmed previous expectations the ECB of the path of inflation, which Draghi used to keep interest rates unchanged. What's more, he added that the drop in liquidity in the money market at the moment is no excuse for movements in the delivery of such liquidity. This is strong formulation, suggesting that loosening will no longer at all. What may change the point of view of the ECB, the decline of inflation in the coming months and / or a significant deterioration in the PMI Index, which at the beginning of the year are very good.
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| chart 1. FRA rate & EUR/USD, 2014-03-10 |
Spread between the market interest rate, and the EUR/USD is very large. However, the declines in the currency pair needed a change of sentiment towards the dollar <chart 1>.
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| chart 2. Volume of the futures on EUR/USD, 2014-03-10 |
It should also show that on the futures contract on EUR/USD on the last day there is a lot of orders at the same time a very small candle on the chart. What does the emergence of very large capital. I personally treat it only as a confirmation. Never as a major factor in decision-making.
regards,
oscarjp
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