Well, I hope Luci Ellis is happy with her stick figures because that’s all that stands between a grossly over-valued Australian dollar and the economy after the ECB joined the global currency war. From the FT:
The European Central Bank lobbed in everything it could – bar quantitative easing –- to counter the threat of a vicious bout of deflation.
Not only did the eurozone’s monetary guardian become the first major central bank to cut rates below zero. It also unveiled a package of liquidity measures to ease strains on credit-starved smaller businesses and signalled there would be more to come if inflation remained excessively low.
The cut to the deposit rate imposes a 0.1 per cent levy on reserves lenders park at the ECB. It will only be charged on so-called “excess” reserves – those which banks do not have to hold as part of rules set by the central bank.
While the ECB hopes the move will lift inflation by weakening the euro and spurring lending in the bloc’s periphery, some economists believe the impact on the economy of such a small cut will be negligible.
The sharp fall in lending to businesses is one of the most worrying trends in the eurozone. The decline has been particularly pronounced for smaller firms in the periphery.
To address this, the ECB has unveiled a targeted offer of four-year loans, designed to encourage banks to lend more to credit-starved SMEs. To take advantage of the loans, which are available at a cheap fixed rate, banks must sign up to as-yet unspecified commitments on lending to businesses.
The ECB president indicated the governing council would shift to a large-scale programme of asset purchases should inflation remain worryingly low.
It’s relatively muted response in context of other central banks but with the clear threat of QE hanging over markets they embraced it anyway before pulling back later in the session.
The Aussie took out 93 cents against the US and rallied on the crosses:
US stocks went nuts, especially high-beta with the Nasdaq putting on 1% and suddenly looking like it could challenge records highs again, only 3% away. The S&P rose strongly too to post a new record high at 1940. 2014 in 2014 looks a real chance. US bonds yawned and yields fell away a little. In truth, I’m not sure how far these moves can run before markets insist on QE proper, the US dollar actually fell against the euro and gold hardly budged. On the weekly chart, the Aussie still looks biased lower over time:
But this is not the end. Global central banks are engaged in a raging currency war that has the Australian dollar totally dislocating from local conditions. We will join them – there are ways of doing it without actually printing, debasing our currency or firing up credit growth – or we will continue to shed productive capacity. It’s that simple, really, simple enough for stick figures even.
