ECB Research: Recalibrating - not reinventing - the toolbox

Danske Research Team Danske Bank A/S

In March this year, we published a piece ECB Research - Action needed urgently, 18 March, where we discussed the various options the ECB could take after the rapid sell-off in early/mid-March at the start of the COVID-19 spread and lockdowns in Europe. With the ECB's pre-commitment at the October meeting to recalibrate its monetary policy stance at the upcoming 10 December meeting, we update the piece and discuss the various options the ECB could deploy.

Lagarde's speech at the ECB Forum on Wednesday gave a clear indication of the focus of the ECB's recalibration of monetary policy instruments. We remain of the view that given the political challenges and the ECB's ability to support the economy via ensuring easy financial conditions on favourable liquidity conditions and low rates, the ECB's toolbox is not the best fit, but should be seen as a conditional and not sufficient package to address the current lockdown and support the economic recovery. Other policy areas hold the key here. The key to note from Lagarde's ECB forum speech is that the ECB will not focus on increased stimuli, but rather ensure a longer accommodative monetary policy stance.

At the 10 December meeting, we expect the ECB to stick to its recent thinking of a targeted and not a general easing of its monetary policy stance, where notably the PEPP and TLTRO are key.

PEPP: Add another EUR400bn to the current PEPP envelope running until end-2021. The ECB may also increase the APP purchase rate, but as this is less powerful than the PEPP, it is not as important unless the monthly purchase rate is increased significantly to e.g. more than EUR40bn/month. The ECB will not commit to a specific monthly target under the PEPP.

TLTRO/PELTROs: Extend the discount window to the entire duration of the liquidity operation (3y). Provide four additional TLTRO liquidity operations until Q1 2022 (quarterly basis). PELTROs to continue into end-2021 on a monthly basis.

Tiering: Increase the tiering multiplier to 10x the reserve requirement.

Collateral: Extending the 7 April grandfathering of the collateral eligibility rules until end-2022.

No rate cut.

Author

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.