Following European Central Bank (ECB) President Lagarde’s dovish comments yesterday that the impact of COVID-19 could be as bad as the 2008 crisis, we believe ECB may dish out stimulus to support the economy. Short EUR/JPY?
- The Federal Reserve, Bank of Canada, Bank of England and Bank of Australia have all cut interest rates.
- The ECB has been quiet lately, only until yesterday whereby ECB President Christine Lagarde warned that the impact of COVID-19 could be worse than the 2008 financial crisis.
- For the rest of the major central banks, it is easy to lower interest rates but the ECB with short-term loans for banks at 0% and secondary rate at negative, cutting rates have limited support for the economy.
- The press conference tonight will be important as President Lagarde will have to calm the market, given the limited ammunition ECB has.
- There are a few things ECB can do to support its economy:
1) Cut interest rates by 10 bps from -0.5% to -0.6%.
2) Increase QE by buying more bonds.
3) Expand existing programme that allows commercial banks to borrow money at a negative interest rate.
4) Helicopter money which is basically printing money and distributing it directly to Europeans though it’s highly unlikely.
- Regardless, the eurozone is in a worse off situation than most countries, with Italy recently calling for a whole country lockdown which will cause a major slowdown in the eurozone as a whole.
- EUR/JPY could head lower as a sell-down in euro will lead to a flow into safe-havens such as yen.
Fullerton Markets Research Team
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