ECB warms up a frozen Euro



by Chris Becker

The currency wars continue! Ever since the GFC, a host of other acronyms has entered the lexicon as global central banks put up various parts of a “Wall” to stave off the White Walkers of deflation.

This week ECB President Mario Draghi announced some more along with the tried and true method of cutting interest rates – now at 0.15% – plus a cut in marginal lending rates and for the first time ever, negative deposit rates!

Alongside these stimulus measures will also be a new series of TLTROs, or as a note from Citi explains:

The ECB announced it will conduct a series of targeted longer-term refinancing operations (TLTROs) to mature in Sep-2018. The initial two TLTROs (Sep-14 & Dec-14) will allow counterparties to borrow up to 7% of the total amount of their loans to the euro area non-financial private sector, excluding household mortgages, outstanding on 30-Apr-14.

The ECB estimates the combined initial take-up to be €400bn.

In the subsequent six TLTROs, to be conducted quarterly from Mar-15 to Jun-16, banks will be able to borrow additional amounts within a limit of 3x each counterparties’ net lending (new loans minus redemptions) in excess of the benchmark recorded in the 12-month period up to 30 April 2014.

The cost of the TLTRO will be fixed at the refi rate prevailing at the time of take-up, plus a fixed spread of 10bp (ie 25bp). An early repayment schedule is provided after 24 months, at a 6-month frequency.

The note goes on further to state “its not clear whether funds obtained through the TLTRO will allow banks to buy sovereign debt” although Draghi said as much in the post-rates decision Q&A. Wait and see.

What does all this mean for the Euro? At the last LTRO from late 2011 through early 2012, the currency was in a freefall against the USD hitting 1.20 – nearer its real value – until a new round of QE by the Fed in August 2012 saw the bloc currency appreciate immensely (as USD crumbled) to near its current levels:



In recent weeks, the Euro has decelerated and overbought condition with a price decline from near 1.40 at the end of April, to just below 1.36, remaining under pressure with support at the 1.3580 level:


This is not oversold (momentum only at -100) and has the potential to rollover again given any catalyst. Indeed, the weekly chart suggests a rollover is already occurring with a distinct lack of upside momentum, with daylight below to the 1.28 handle:


Are speculators positioning themselves for the inevitable reversal in the Euro? Are the lower rates and negative deposit rates alongside the new TLTRO going to do it? A weaker currency is what all nations – apart from Australia apparently – want to juice domestic demand, but maybe the weapons of war are losing their edge, or is the ECB delaying the inevitable?

A final note from Citi:

We still expect the ECB to launch a fully-fledged QE, possibly in Dec-14.

That’ll do it.


Latest posts by Chris Becker (see all)


  1. Have we got to the ‘Red Wedding’ yet?

    “The currency wars continue! Ever since the GFC, a host of other acronyms has entered the lexicon as global central banks put up various parts of a “Wall” to stave off the White Walkers of deflation.”

    Spoiler alert: “the white walkers win!”

  2. Charles Ponzi

    Deflation is part of the healing process as economies start to deleverage. Deflation is actually helpful.

    • And anyone with cash is waiting for the inevitable deflation. It may be time for the EU to tax those deposits.

    • darklydrawlMEMBER

      Well that entirely depends on your situation. Most Governments / countries are desperate to avoid the downward spiral on deflation.

      Firstly because they are wanting to inflate away their debt. If you owe money at 5% but inflation is running at 3%, the effective interest rate is only 2%.

      If inflation goes the other way (say 1% or negative) then the effective rate to pay off that debt is a magnitude bigger.

      Secondly is the consumer market. Why would you / anyone purchase any goods / services this month if you know it is likely to be cheaper next month and so on.

      As a result, manufacturing stalls as demand slows – which adds to the cycle of deflation. An economic death spin that is hard to break out of.

      So in some sense you are correct – it probably needs to happen, but no-one is keen to take the pain. A bit like housing and wages in Oz.

  3. if australia is the only country to not fight in the currency war, then presumably the AUD rises.

    presumably, then our exports are further hurt (and tourism)

    eventually, our economy suffers and the AUD falls

    is this the BEST way for us, for it to play out this way? maybe it is???