Chillin' out till it needs to be funded
The Dollar decline follows in Asia tomorrow after ECB cut rates and the Euro promptly breached 1.24 levels at the lower end before resuming tradin ga t 1.24 levels after the US market holiday on Wednesday. ECB had earlier refused to let rates below 1% but have taken it to 0.75%
This was followed by another GBP 50 B Pound sterling from BoE even as Draghi extended his press call to revie policy and media impressions of the coming changes in the EU. Draghi pointed out the decision to be unanimous though many expected the ECB to plump for a 50 bp cut. Draghi hasd more success in getting the ball rolling in November with LTRO but as none of the sovereign yields are easing up the ECB floor has not held and it will be managing a contracting Economy with near zero interest rates if it is forced to cut rates further. China lending rates came from 6.31% to 6% and deposit rates were cut to 3%. Lending rates can now go down to 70% of benchmark against 80% previously. Coordinated Central Bank Intervention has more to come after tomorrow’s Jobs report gets more pressure on the Fed window across the four OECD Central Banks. India may not cut interest rates in July as the Rupee is only miday thru a recovery.
The ECB money market deposit rate has been cut to zero. China also pumped in stimulus earlier in the day. BoE rates are steady at 0.5% even as Inflation has fallen below 3% bringing new concerns to the currency and the Economy. The BOE QE score is up to GBP 375B with June and today’s announcement
European stocks are down with the Euro as a rate cut is not going to solve their problems. Also banks ill be forced to use the EUR800B deposited ith ECB sooner or later as they no longer get paid to keep it with the ECB. Draghi mentions we havet discussed “negative” deposit rates further. Though the Securities Market Program is not going to be activated, Italian and Spanish yields will benefit from Growth Compact agreed last week as well as the Direct debt to banks thru the ESM and EFSF without ornery conditions. Those programs have to move towards implementation before European Banks would think about restarting active lending and even then they have not completed deleveraging to the new Basel III regulations. European Banks remain leveraged tice the extent of US banks at nearly 25-30 times their Core Capital.
In the immediate term the only likely relief will come from Oil prices falling again as the Euro zone cracks get bigger. Italian and Spanish yields are better at 6.66% and 5.2%