Riksbank In Surprise Cut
Three central banks are scheduled for decisions today and the Riksbank was the first to spring a surprise with a 25bp cut (cons. 1.50%). Like other ‘AAA’ central banks of late, a strong currency was an issue but only in an inflation context, and in contrast to the RBA there was no need to cite excessive demand for the country’s paper from individual buyers. Insofar as policy benefits, this was additional stimulus and markets would want to see if the ECB is next. Draghi’s intentions appear to have been well flagged already by a series of leaks and passive acknowledgements by other government officials. The official verdict is due, but so far the known details have appeared to have satisfied the basic demands of markets. Sterilised purchases may go some way to placate German lawmakers fearing monetization and inflation issues, while dropping seniority status might also encourage the private sector to participate as well. How much buy-in the Bundesbank and more hawkish German official wish to provide is an open question, while waiting for the relevant recipients of the programme to officially request assistance will also test the Eurozone’s resolve in the coming weeks as the details become clear. Nonetheless, with the euro trading up to 1.26 and positioning still quite favourable for another squeeze higher, the pressure is on Draghi to follow up, but we advise against expecting the unacceptable, insofar as policy, legal and political constraints provide. As noted in our latest FX Comment (“Trading Draghi”), the ECB meeting ahead today might initially be viewed as a disappointment, since it may be slightly early for the presentation of the finer details and modalities of the bond buying programme. In addition, we need to be cognizant of the other decisions in play. A 25bp cut in the main refinancing rate is expected, though the verdict is out on whether the deposit rate will also be adjusted. Even after the ECB exhausts its options bar full-blown unsterilized bond purchases, it is not the central bank’s job to address the finer details of structural reform within the Eurozone and it won’t take long before that factor sets in. During the Asia session Australia reported a mixed unemployment report: 8.8k jobs were lost but largely due to declines in parttime employment. The unemployment rate fell to 5.1% as the participation rate declined. European bourses are in positive territory, following on from their peers in Asia. Overnight EURUSD traded in a range of 1.2594-1.2635 and USDJPY 78.38-78.48.
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UBS Investment Bank