ECB Speculation Pushes Fed Out of the Spotlight
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- Euro, risk trends hinge on whether ECB satiates markets' thirst for stimulus
- BOC rate decision likely a non-event as Poloz waits for details of fiscal plan
- NZ Dollar volatility to follow RBNZ policy meeting on evolving rate cut bets
After weeks of preoccupation about the trajectory of Federal Reserve monetary policy, the markets will shift their gaze to the European Central Bank. President Mario Draghi and company are expected to deliver at least another 10 basis point cut to the deposit rate, pushing it deeper into negative territory.
The supply of global monetary stimulus has been a major driver of market-wide risk appetite trends, with shares tracking a broad-based measure of market liquidity. With that in mind, the ECB's policy stance is likely to have implications beyond the Euro and fuel volatility across the spectrum of benchmark assets.
If the ECB delivers pushes the deposit rate to -40bps as is already reflected in forward pricing, investors are likely to be disappointed. Subsequent price action is likely to mirror what happened in December when a similarly pre-telegraphed move failed to inspire enthusiasm.
A truly big-splash gesture would require not only a deposit rate cut but also an increase in up-front QE, increasing monthly purchases from the current rate of €60 billion/month. If this is delivered alongside the rate reduction, the Euro is likely to decline alongside the likewise anti-risk Yen while high-yielding FX such as the Aussie and Kiwi Dollar risk with share prices.
Policy announcements from the Bank of Canada and the Reserve Bank of New Zealand are likewise on tap. The former may be a non-event: Canadian economic data has continued to improve versus expectations since January's BOC meeting and Governor Steven Poloz seems unlikely to abandon wait-and-see mode until the government's fiscal plans are unveiled later this month.
The latter may stoke volatility however as traders comb through the policy statement for clues about when the RBNZ may resume interest rate cuts. Markets price in at least one 25bps reduction and see an 82 percent probability of a cumulative 50bps in easing over the coming 12 months.
--- Written by Ilya Spivak, Currency Strategist for DailyFX.com
Contact and follow Ilya on Twitter: @IlyaSpivak