ECB to assess impact of new measures before further action - TD Securities

By FXstreet.com | June 27, 2014 AAA

FXStreet (Łódź) - Richard Kelly, Head of European Rates and FX Research at TD Securities believes that the ECB monetary policy meeting, which will be held next Thursday, shouldn't be as interesting as the last, as the central bank waits to see the impact of the new measures before taking further action.

Key quotes

"There is going to be a long wait-and-see period now in seeing whether the euro can drift lower, whether there will be strong take up in
the TLTROs, and whether growth and inflation forecasts can drift low enough to get the ECB to act further."

"We believe there is scope for the policies already announced to have a long and lasting impact within Eurozone markets, especially for bank funding costs, and while there is a large margin of uncertainty around this, we think it is something markets are currently discounting."

"Looking through the array of borrowing rates for Eurozone banks demonstrates the potential for the TLTROs to be tremendously effective at narrowing credit spreads further and reducing the fragmentation further in Eurozone financial markets."

"EUR 5y5y rates seem to want to test the lows of recent years, but we see this dynamic as much more
constructive to the Eurozone recovery now than what the drivers were then. This is now lower rates on the pessimistic outlook, but a central bank that is engineering a message of lower for longer as a means to help banks refinance themselves in the coming years in a way limits deleveraging costs as much as possible and is actually moving up the timing for the eventual exit."

"As a result, we will continue to look for the turn in Eurozone data that con-firms a 2% annualized pace is being sustained through the rest of the year, which should then set up EGBs and EUR swaps and forwards for strong conviction steepening trades."

"We think QE from the Eurozone remains only a risk and is not likely. The bank credit channel is immensely more important for the transmission of monetary poli-cy in the Eurozone. So while asset purchases can play a role in a generalized deflationary environment in the Eurozone, if the goal is furthering the chance for credit growth and growth, TLTROs will be more effective than buying of government debt. "

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