Draghi Moves Rates and the Euro Follows09-10-2014 |
Sources: Rates Data and Economic Calendar—Bloomberg Markets as of 9/8/14; Equity Market Returns and Fixed Income and Alternatives Data—Wells Fargo Advisers as of 9/8/14
Draghi Moves Rates and the Euro Follows
Mario Draghi has backed up the dovish remarks he made during his August 22 speech at the Fed’s Jackson Hole summit with three rate cuts that were announced Thursday, September 4th. The cuts are aimed at spurring lending in the Eurozone as the area continues to make strides at fighting deflation and keeping its economy on an upward trajectory. Specifically, the ECB cut the refinancing rate by 10 bps to 0.05%, the already negative deposit rate was cut further from -0.1% to -0.2% and the marginal lending rate has been cut to 0.3% from 0.4%. Perhaps more significantly, Draghi announced that the ECB is considering additional stimulus measures in the form of Quantitative Easing and will be discussing the details of the program during their October meeting.
The Euro sold off almost immediately following Draghi’s comments and is currently trading around $1.29, its first trip below the $1.30 support level in over a year. This is significant because not only does it signal a more competitive export environment for the Eurozone but also a strengthening dollar. Further strength in the greenback could be seen as the Fed moves closer to their first interest rate hike in 7 years, which, we are expecting in 2015.
While the ECB exhibits signs of a more accommodative monetary stance, the Federal Reserve looks to take a step towards the other side of the spectrum as it gets ready to unwind its own quantitative easing program in October. While the scale of the ECB’s asset purchases is unknown, the world’s second largest central bank will be providing liquidity that could help to offset the moves taken by the Fed and keep downward pressure on global interest rates. Given the importance of interest rates in asset pricing and the many moving parts in the global economy, we suggest a careful review of how your portfolio may be affected over the next 12 months.
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