EUR USD (1.2285) Given the seniority of the individuals involved in yesterday’s various meetings – Draghi, Schaeuble, Geithner – news about the outcomes was surprisingly thin. The market is on tenterhooks; following the ECB president’s fervent defence of the euro last week, investors are keen to hear some details on his plans. There could be many possibilities: interest rate cuts; negative deposit rates; LTRO3; SMP2; unsterilized QE. All of these possibilities have been tried before – if not by the ECB then by another major central bank. It seems the market’s imagination for policy action does not extend beyond the familiar tools; few can conceive a policy that has never been used before. Arguably, something new is what Mario Draghi must deliver. By his own admission, the monetary policy transmission mechanism is broken. This means a rate cut, or even an LTRO, would be a futile gesture. What is worse, the market would immediately discount any familiar policy action simply by comparing its size and scope to past instances. The beauty of a wholly new measure is that it cannot be easily discounted; the ECB cannot be labelled ‘behind the curve’ when nobody knows the impact of the policy. Take the example of the BoE’s new Funding for Lending scheme. Predictions for its efficacy range from ‘top’ to ‘flop’, but observers are obliged to wait and see. The euro is also in wait-and-see mode, but maintains an upward potential to 1.2465. Our initial 1.2230 support limited yesterday’s dip, but we believe the best demand is down at 1.2150.
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Deutsche Bank