Euro Downside May Be Limited Even if ECB Opts to Cut Rates

The Euro may not see lasting selling pressure if the ECB opts to cut its benchmark interest rate unless the move is coupled with substantial non-standard easing.

Talking Points

Euro Selling May Be Short-Lived Even if ECB Delivers Interest Rate Cut
Australian Dollar Sold as Asian Stocks Fall, China’s PMI Data Disappoints

The European Central Bank is in the spotlight as Mario Draghi and company deliver their monthly monetary policy announcement amid widespread speculation about a 25bps interest rate cut to address the region’s deepening recession. However, the negative impact of such a move on the Euro is likely to be limited unless it is accompanied with the introduction of non-standard easing efforts.

The market rate to borrow Euros overnight has averaged around 0.1 percent over the past 12 months. That means cutting the ECB benchmark lending rate from 0.75 to 0.5 percent would be essentially moot in terms of lowering regional borrowing costs. Meanwhile, a Bloomberg index tracking Eurozone financial conditions has shown slow deterioration since late January, underscoring the inability of low rates by themselves to secure a supportive funding environment.

On balance, this means that a rate cut alone would not significantly undermine the Euro’s yield profile or go a long way toward offering monetary stimulus to the sagging regional economy. That suggests the impact of a rate reduction absent an accompanying QE-like effort – either announced outright or telegraphed in ECB President Mario Draghi’s post-decision press conference – will probably prove limited at best.

In the larger sense, the markets may interpret a rate cut unpaired with non-started measures broadly disappointing from a risk appetite perspective in terms of its limited ability to boost the global growth outlook. That bodes well for safety-linked currencies – most notably, the Japanese Yen – against cycle-sensitive counterparts like the Aussie and Kiwi Dollars. The Swedish Krona and Norwegian Krone may likewise see outsized losses in the context of a deteriorating outlook for economies anchored to Eurozone demand.

The Australian Dollar underperformed in otherwise quiet overnight trade as Asian stocks declined, weighing on the sentiment-linked currency. A disappointing Chinese Manufacturing PMI number from HSBC reinforced downward pressure. The report showed factory-sector activity grew at the slowest pace in two months. The Canadian Dollar crept higher after a dovish FOMC announcement reinforced the likelihood of lasting policy support for

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