Eur/usd - page 48
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ECB Said to Consider Mini Deposit-Rate Cut If Needed
The European Central Bank is considering a smaller-than-normal cut in the deposit rate if officials decide to take it negative for the first time, according to two people with knowledge of the debate.
Policy makers would reduce the rate for commercial lenders who park excess cash at the ECB to minus 0.1 percent from zero, said the people who asked not to be identified because the talks aren’t public. It would be the first time the central bank has adjusted interest rates by less than a quarter of a percentage point. The concept, which has been discussed by Governing Council members, doesn’t yet have a consensus, the people said.
Members of the council, which is holding a mid-month meeting in Frankfurt this week, have said that a negative deposit rate is a potential tool for warding off deflation. They’ve also cautioned that the consequences of such an unprecedented measure aren’t clear. The central bank this month refrained from cutting the deposit rate even as it reduced its benchmark lending rate to a record low of 0.25 percent, and Governing Council member Jens Weidmann has warned against further loosening of monetary policy.
A smaller reduction in the deposit rate “would make sense, given this is uncharted territory,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “The ECB needs to do more to fight uncomfortably low inflation (ECCPEMUY), which could expose the euro zone to deflationary risks.”
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Incredible. They are finally going to do it. They are not going to call it a "Cyprus model" but it will be a plain old fashion ripoff. People, take your money out of the banks (while you still can)
Euro slides on report about ECB negative deposit rates
The euro tumbled across the board on Wednesday after a report that the European Central Bank is considering negative deposit rates to boost inflation closer to its target.
Bloomberg reported that if the ECB decides to take the deposit rate for cash it holds overnight for banks into negative territory, the rate would fall to -0.1 percent. The ECB's current deposit rate is at zero. An ECB spokesperson declined to comment.
The ECB cut interest rates to a record low earlier this month, and ECB President Mario Draghi said the central bank was "technically ready" for negative rates, if warranted by the economy.
The news from Europe was in stark contrast to the latest views by Federal Reserve policy makers.
James Bullard, president of the St. Louis Federal Reserve Bank, on Wednesday told Bloomberg television that recent U.S. economic data is looking better and a "strong" jobs report for November would increase the likelihood that the Fed may decide to start scaling back bond buying at its meeting next month.
"The news highlighted the opposing outlooks for monetary policy in the euro zone compared to the U.S. where the Fed appears on a steady path to reducing stimulus," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
The euro fell as low as $1.3444 on the ECB news and last traded at $1.3455, down 0.6 percent. Against the yen, the euro dropped 1.0 percent to 134.51, after earlier touching a four-year high.
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What’s a negative deposit rate anyway?
We’re hearing more and more about the idea that major central banks could turn their deposit rates negative in an effort to stimulate their economies. The European Central Bank is reportedly considering such a move, and officials at the Federal Reserve keep bringing up the idea.
So, what’s a negative deposit rate anyway?
To get a sense of it, you start with the more common phenomenon: A positive deposit rate. This is a policy tool whereby banks can park their reserves with central banks and in return pick up a small amount of interest. The ECB, for example, pays out 0.1% and the Fed pays out 0.25%. It’s kind of like a low-yield savings account for the banks
The Fed introduced its rate in 2008 to help calm short-term interest rates during the financial crisis. Since then, banks have put $2.3 trillion worth of reserves into the system, according to Reuters. By depositing money with the Fed, they earn well more than they would using the fed funds rate, the rate at which banks lend to each other overnight.
Changing the deposit rate serves as one tool central banks can use to influence how banks spend their reserves. If banks can earn a healthy return depositing reserves at a central bank, they are likely to do so. But if they can’t, they’re likely to deploy their cash elsewhere, such as by lending to households and businesses, which would benefit the broader economy. So by making the deposit rate negative, the central bank is trying dissuade these risk-averse banks from locking up their cash.
The ECB is reportedly considering lowering its deposit rate from 0.1% to negative 0.1%, according to Bloomberg, which cited anonymous sources. That means banks would have to pay the ECB to lend to it overnight, an unprecedented move for the bank (which sent the euro weaker Wednesday). Such a move would make it less attractive for banks to park their reserves at the ECB.
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French Private Sector Slips Back Into Contraction In November
Activity in the French private sector decreased in November, after recording modest growth in the previous month, as both manufacturing and services activity fell sharply, survey data released by Markit Economics showed Thursday.
The seasonally adjusted composite output index, which gauges the performance of the manufacturing sector and the service sector, dropped to 48.5 in November from 50.5 in October. Index readings below 50 suggest contraction, while those above 50 indicate expansion. The November reading was the lowest since June.
Production in the French private sector decreased for the first time in three months, with both the sectors recording lower output levels. New orders decreased for a second successive month in November.
Employment in the sector contracted in November, after having risen for the first time in 20 months in October. On the price front, input price inflation accelerated to an 11-month high, while output prices decreased further.
The purchasing managers' index (PMI) for the manufacturing sector dropped to a six-month low of 47.2 in November from 49 in October. Economists had forecast an increase to 49.5.
At the same time, the PMI for the services sector fell to 48.8 from 50.9 in October, hitting the lowest level in four months. The index was forecast to Rise to 51.
source
Euro zone economy losing steam as PMIs disappoint
Business activity in the euro zone fell unexpectedly in November, prompting concerns that the 17-nation bloc's economic recovery is losing steam.
The flash composite euro zone purchasing manager's index (PMI) fell to 51.5 in November, down from 51.9 in October, data from economic analysts Markit showed on Tuesday. Analysts polled by Reuters had expected a figure of 52.0.
While still above the 50-point mark that separates expansion from contraction, analysts worry the index is slipping in the wrong direction, particularly as it follows worse-than-expected third-quarter growth in the euro zone.
After the longest contraction in continental Europe in over 40 years, the region had pulled out of an 18-month stretch of negative growth in the second quarter of 2013.
In the third quarter of 2013, however, the annual GDP of the euro zone grew by just 0.1 percent, marking a slowdown from an expansion of 0.3 percent in the second quarter, according to data from Europe's statistics agency Eurostat.
The jobless rate, meanwhile, remained at a record 12.2 percent in September.
The European Central Bank is concerned about slowing growth in the region and cut rates to a new low of 0.25 percent last time it met in an attempt to stimulate the economy and counteract concerns over deflation.
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ECB's Draghi Plays Down Negative Deposit Rate Talks
European Central Bank President Mario Draghi on Thursday rejected media reports that the central bank is planning to take the deposit rate to negative territory.
"Let me plead with you - don't try to infer from what I say today anything on the possibility of negative rates on the deposit facility," Draghi said in a speech in Berlin.
"As I said at the press conference: this was discussed in the last monetary policy meeting and there are no news since then," he said at the event organized by the German newspaper Suddeutsche Zeitung.
"Let me make this clear," he added. The euro rose following Draghi's comments.
On November 7, the ECB sprung a surprise by cutting the key interest rate by a quarter-point to a record low 0.25 percent, given the combination of low inflation, record unemployment and a stronger currency.
In the post-decision press conference on November 7, Draghi reiterated that the ECB was "technically" ready to move the already-zero deposit facility rate, if needed.
Citing two unidentified central-bank officials, Bloomberg News reported this week that the Governing Council is mulling over a reduction in the deposit rate to minus 0.1 percent in a bid to avoid deflation.
Recent ECB rhetoric suggest that the bank may also consider extraordinary measures such as asset purchases in coming months.
Eurozone inflation fell to a four-year low of 0.7 percent in October. The ECB aims to keep inflation 'below, but close to 2 percent'.
"We need this buffer away from zero to provide a safety margin against deflationary risks at the euro area level," Draghi said.
Regarding the rationale behind the latest rate cut, Draghi said, "The context of this decision was a gradual but sustained downward drift in inflation that we had observed over several months."
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EUR/USD Steady Ahead of German Business Climate
EUR/USD is trading quietly on Friday, as the pair trades in the high-1.34 range in European trading. Thursday was a busy day for US releases, highlighted by a strong Unemployment Claims release. On the downside, PPI posted another decline and the Philly Fed Manufacturing Index looked awful.
Taking a look at Friday’s events, German Ifo Business Climate, a market-mover, will be released later on Friday. ECB head Mario Draghi will speak at a banking conference in Frankfurt. In the US, there’s a pause in the action after two busy days. Today’s highlight is JOLTS Job Openings.
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'Europe heading for catastrophe' despite German growth
The euro zone's largest economy Germany might be powering ahead in terms of growth but the euro zone as a whole is heading towards a "catastrophe," one economist warned on Friday.
Growth data for Germany released on Friday showed the economy had grown by 0.3 percent since the last quarter, marking a 1.1 percent increase year-on-year. In addition, the business climate index from German think-tank Ifo – which measures business confidence among 7,000 domestic firms – climbed to 109.3 in November, surpassing forecasts and October's 107.4 reading.
The data followed euro zone business activity for November which indicated a growing divergence between Germany and the rest of the euro zone.
Both the German manufacturing and the services sectors performed better than expected while data for France, the euro zone's second largest economy, showed a contraction.
The PMI data marked another point of disappointment for the euro zone, which has already experienced a growth slowdown in the third quarter.
The single currency region's GDP grew by just 0.1 percent in the third quarter, marking a slowdown from an expansion of 0.3 percent in the second quarter.
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The news is so mixed on Europe at the moment. Germany seems good but the others seem weak. I expect that EURUSD will go sideways for the next few months in all this indecision