11 Jul 2013
Flash: ECB refuses to depreciate EUR – UBS
FXstreet.com (New York) - “The ECB is aware of the structural factors preventing further euro declines at present, such as improving balance of payments, positioning and disinflationary pressures.” notes Research Analyst Gareth Berry at UBS.
More importantly, the ECB's balance sheet is still contracting outright, versus expansion in the Fed, BoJ and possibly the BoE in the near future. According to Berry, “Most central banks will stress that balance sheet dynamics have no bearing on currency performance over the longer-term and for the Fed this may be true.”
Moreover, the ECB would argue that the lack of permanence with LTROs means it was currency-neutral in the first place. Nonetheless, central banks should also be aware that perception often matters more than reality.
During the 'expansion phases', (SMP & LTRO), balance sheet growth had a clear 'debasement effect'. However, since the balance sheet peaked in end-Q2 2012, contraction has actually been euro-neutral.
More importantly, the ECB's balance sheet is still contracting outright, versus expansion in the Fed, BoJ and possibly the BoE in the near future. According to Berry, “Most central banks will stress that balance sheet dynamics have no bearing on currency performance over the longer-term and for the Fed this may be true.”
Moreover, the ECB would argue that the lack of permanence with LTROs means it was currency-neutral in the first place. Nonetheless, central banks should also be aware that perception often matters more than reality.
During the 'expansion phases', (SMP & LTRO), balance sheet growth had a clear 'debasement effect'. However, since the balance sheet peaked in end-Q2 2012, contraction has actually been euro-neutral.