ECB first cen­tral bank to in­tro­duce neg­a­tive de­posit rates

Financial Mirror (Cyprus) - - FRONT PAGE -

For the past month, the fi­nan­cial mar­kets had been ea­gerly await­ing the lat­est ECB in­ter­est rate de­ci­sion and it cer­tainly de­liv­ered. The ECB in­tro­duced a num­ber of new pol­icy mea­sures, in­clud­ing cut­ting in­ter­est rates to a new record low of 0.15%, a ECB 400 bln fund to en­cour­age bank lend­ing and the in­tro­duc­tion of neg­a­tive de­posit rates. The ECB is the first ma­jor bank to in­tro­duce neg­a­tive de­posit rates, and this ba­si­cally means that banks will now be charg­ing to keep money within their bank. ECB Pres­i­dent Mario Draghi hopes the in­tro­duc­tion of neg­a­tive de­posit rates will en­tice con­sumer lend­ing and pre­vent the EU from en­ter­ing dan­ger­ous de­fla­tion ter­ri­tory.

The mar­kets re­acted er­rat­i­cally to the ECB’s new pol­icy mea­sures as the EURUSD fell to its low­est val­u­a­tion of 2014. How­ever, when it was con­firmed that the ECB was not yet im­ple­ment­ing its own Quan­ti­ta­tive Eas­ing pro­gramme, the EURUSD quickly re­gained these losses. Af­ter the ECB in­ter­est rate de­ci­sion, Draghi de­liv­ered a dovish press con­fer­ence where he threat­ened that the ECB is far from fin­ished adding ECB stim­u­lus. With the ex­cep­tion of French Job­less Claims, the up­com­ing week is low in vol­ume with eco­nomic re­leases from the EU, and it looks like the bears are set to dom­i­nate the fu­ture di­rec­tion of the EURUSD.

The other ma­jor news was the lat­est US em­ploy­ment re­port, which continues to sig­nal that the US econ­omy is gain­ing mo­men­tum. Al­though the US un­em­ploy­ment rate stayed un­changed at 6.3%, the US econ­omy cre­ated 217,000 jobs in May. This was the fourth con­sec­u­tive month that the US econ­omy added more than 200,000 jobs to their pay­roll, and the first time this had been achieved in over 14 years. For the past year, 2.4 mln jobs have been cre­ated by the United States econ­omy.

Over­all, the US jobs re­port was seen pos­i­tively. The main im­prove­ment noted was the need for more con­struc­tion jobs to be cre­ated in the com­ing months. Only 6,000 con­struc­tion jobs were cre­ated in May.

In ref­er­ence to aver­age wage growth, wages in­creased by 2.1% on the year be­fore. An­a­lysts feel a 3% wage in­crease is re­quired for con­sumer ex­pen­di­ture to ac­cel­er­ate. This is par­tic­u­larly im­por­tant for the US econ­omy, be­cause con­sumer ex­pen­di­ture ac­counts for 70% of the over­all US GDP.

In re­gards to the Ja­panese econ­omy, Ja­pan’s lat­est GDP fig­ure was re­vised up to 1.6%. This had lit­tle ef­fect on the fi­nan­cial mar­kets though, with an­a­lysts still try­ing to mule over the ac­cu­racy of Ja­pan’s lat­est in­fla­tion data. Last month, Ja­panese con­sumer prices in­creased to their fastest pace in 23 years, at an an­nu­al­ized 3.2% growth level.

On re­flec­tion of the CPI, it was ap­par­ent that a sales tax re­cently im­ple­mented in April en­cour­aged additional con­sumer ex­pen­di­ture. De­spite the sales tax en­cour­ag­ing con­sumers to pur­chase, house­hold spend­ing ac­tu­ally con­tracted by an an­nu­alised 4.6%. The IMF have al­ready in­di­cated that this CPI re­lease is not sus­tain­able and Ja­panese in­fla­tion will not con­sis­tently achieve the BoJ’s 2% tar­get un­til 2017 at the ear­li­est. Fur­ther­more, it is now feared that the sales tax will lead to weaker than ex­pected up­com­ing GDP data.

Fi­nally, the lat­est Aus­tralian GDP re­lease sur­prised, with GDP ex­pand­ing by 1.1% for the past three months. How­ever, there were raised eye­brows over min­ing ex­ports that ac­counted for 0.9% of this in­crease.

It has long been ad­vised that the Aus­tralian econ­omy needs to slow down their over re­liance on min­ing and ex­ports. In the fu­ture, it has been iden­ti­fied that the Aus­tralian econ­omy must fo­cus on do­mes­tic con­sump­tion, such as con­struc­tion and busi­ness in­vest­ment. This will likely put in­creased pres­sure on this week’s Aus­tralian met­ric re­leases. On Tues­day, both busi­ness and con­sumer con­fi­dence are re­leased and on Wed­nes­day, the lat­est un­em­ploy­ment data is an­nounced.

The main news is likely to be fo­cused on the RBNZ’s in­ter­est rate de­ci­sion on Wed­nes­day evening. The ma­jor­ity of econ­o­mists are ex­pect­ing that the RBNZ is set to raise rates for the third time this year, but it is still pos­si­ble that an in­ter­est rate hike could be de­layed this month. The RBNZ blamed re­cent poor eco­nomic data on a higher val­ued NZDUSD; and if it does raise rates, a dovish state­ment threat­en­ing the fu­ture use of cur­rency in­ter­ven­tion may be used in the hope of de­ter­ring buy­ers away from the Kiwi.

We are also ex­pect­ing eco­nomic data from the United King­dom this week. On Tues­day, the lat­est Man­u­fac­tur­ing and In­dus­trial pro­duc­tion fig­ures are ex­pected to show­case fur­ther ex­pan­sion. How­ever, vo­latil­ity is more likely to oc­cur dur­ing the re­lease of the lat­est UK un­em­ploy­ment rate on Wed­nes­day morn­ing. The UK un­em­ploy­ment rate is al­ready within the BoE tar­get to rais­ing in­ter­est rates, but they are in no hurry to raise rates. There­fore, GBPUSD losses is a pos­si­bil­ity for this Wed­nes­day.

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