Euro, Yen And Aussie Dollar May See Sharp Moves On ECB Outcome

All eyes are on the ECB monetary policy announcement in European trading hours. The markets are primed for stimulus expansion, but the way in which it is delivered can generate vastly different outcomes for the Euro and the broader asset universe at large.

The MSCI World Stock Index – a proxy for global risk appetite trends – has closely tracked global liquidity trends. This makes for an environment where actions judged as dovish by the world’s top central banks trigger “risk-on” dynamics that benefit equities and high-yielding currencies alike. Needless to say, hawkish outcomes have the opposite effect.

Extending the existing €60 billion/month QE effort and pushing deposit rates deeper into negative territory underwhelmed investors in December. The move brought policy rates in line with a drop in borrowing costs already priced in by investors while offering no up-front boost to asset purchases. The Euro raced sharply higher and stocks fell as a result.

This time around, traders are front-running a deposit rate cut once again. Accounting for the spread between the EONIA benchmark for EUR-based overnight borrowing costs and the ECB deposit rate,markets envision at least a 10 basis point reduction. If the ECB does not meaningfully exceed their expectations and offer a tangible boost to the size of QE asset purchases, another disappointment is likely.

Besides sending the Euro higher, such a result will probably hurt risk appetite. This may see sentiment-geared FX like the Australian, Canadian and New Zealand Dollars trade lower alongside share prices while the anti-risk Japanese Yen advances. On the other hand, a bold dovish move will likely deliver the opposite results.

Asia Session

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EVENT

ACT

EXP

PREV

20:00

NZD

RBNZ Official Cash Rate

2.25%

2.50%

20:05

NZD

RBNZ’s Wheeler Holds News Conference

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