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.
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