The Fed may or may not be able to afford schizophrenia regarding the future of its monetary decisions (for now), but the ECB, in charge of a continent mired deep in depression, does not have that luxury. While consensus overwhelmingly expects a 25 bps cut in the main refinancing rate, some have warned that should the ECB not engage in such a cut, the EUR will tumble as the short covering squeeze ends with a thud. What exactly are the individual banks expecting? The following bulletin from Bloomberg summarizes it all.
Deutsche Bank:
- Potential ECB refi rate cut today doesn’t matter much; currency market more sensitive to short-end money market rates and without a deposit-rate cut, today’s decision won’t have a big impact, George Saravelos, strategist at Deutsche Bank, writes in note
- Refi rate cut is relevant for European long-end as it encourages carry trades, discourages LTRO pre-payments, caps potential Eonia rise
Morgan Stanley:
- If ECB only delivers the expected 25bps cut with no further non-standard measures, it will leave EUR vulnerable, Hans Redeker, strategist at Morgan Stanley, writes in note
Yday’s reaction to Fed statement suggests that delivering within expectations is insufficient to keep asset markets supported
- Move below 1.3090 will signal renewed negative trend, suggesting that recent EUR/USD rebound is complete and broader downtrend is resuming
Citigroup:
- EUR’s response to ECB decision will depend on type and aggressiveness of measures announced, Valentin Marinov, strategist at Citigroup, writes in note
- Easing plans that are too aggressive, or signals of further aggressive easing without detailed SME lending plan, may weigh on EUR; EUR could be supported if ECB cuts rates and unveils concrete proposals to stimulate the lending channel
- ECB would have to sound very dovish or deliver a 50bps cut for front-end to rally; look for better entry points than 1% in 3Y1Y receivers, probably in week after ECB
Standard Bank:
- Not recommending any new positions today; wise to wait for ECB decision before committing to any new trades, Steven Barrow, strategist at Standard Bank, writes in note
Barclays:
- Rate-cut expectations should be fully priced into EUR by now; risks are skewed to EUR strength due to possibility of new non-standard measures and short EUR positioning, Raghav Subbarao, strategist at Barclays, writes in note
- Reaction in rates markets likely limited; rates already low and already incorporated expectations of 25bps cut; no rate cut and absence of hints on June reduction will disappoint and fuel volatility at front-end, Giuseppe Maraffino, strategist at Barclays, writes in note
UniCredit:
- EUR/USD will benefit if ECB remains on hold (which UniCredit expects), Luca Cazzulani, strategist at UniCredit, writes in note
BNP Paribas:
- 25bps refi rate cut is fully priced in now and EUR/USD can gain further ground if this scenario is confirmed, Steven Saywell, strategist at BNP, writes in note
- Additional measures to boost credit for SMEs may support EUR due to improved risk appetite; a change in inflation language without rate cut should on balance be EUR-supportive
- Eonia curve shows 1-mo. OIS already 6bps to Sept.; thus a 25bps refi rate cut is almost fully priced in; little value in bunds at 1.2% and recommend staying short
ING:
- House view is ECB will prefer June cut, but Draghi may not want to disappoint market given already fragile sentiment, Chris Turner, strategist at ING, writes in note
- Net effect of ECB refi-rate cut may be EUR-supportive; money-market rates already near zero and bigger impact will be on euro-zone banking stocks which will enjoy lower borrowing costs
Lloyds:
- Market has shifted away from expecting EUR weakness on ECB refi rate cut; EUR may slump if ECB doesn’t cut refi rate as credit markets will be disappointed
- EUR may dip initially on rate cut -- a buying opportunity; strongest positive reaction will likely be EUR/CHF
- Too early to expect non-standard measures; Draghi may maintain update commentary
BOTM-UFJ:
- Impact of ECB rate cut is likely to be limited with short rates already close to the deposit rate
- Negative impact on EUR from rate cut is likely modest as market is already fully expecting a 25bps refi rate cut
RBC:
- Expectations for ECB easing have built up significantly; market pricing of policy action today looks somewhat overdone, Norbert Aul, strategist at RBC, writes in client note
- Reiterate April 25 recommendation that investors pay 1Y, 2Y-forward Eonia with target of 45bps and stop at 30bps: Aul
Commerzbank:
- Risks in ECB policy decision today are balanced toward disappointment, as rate cut is already priced in and new easing measures need to be unveiled to boost markets; enter tactical bund-future shorts