ECB cuts interest rates, expands QE

Daily Analysis - 11/03/2016

Euro trims losses as ECB announces rate cuts and QE expansion

The European Central Bank decided to cut all the key interest rates at its meeting yesterday while expanding the Eurozone QE bond purchases by an additional 20 Billion Euros. Bringing the key lending rates to zero percent, the ECB also lowered its deposit rates by another 10bps to -0.40% in an effort to stimulate growth and stoke inflation which has consistently fallen below the ECB's target rate of 2.0%.

Euro trades above $1.10, pares earlier losses

Despite the ECB announcing a host of measures which clearly outdid market expectations, the Euro trimmed its losses and instead closed yesterday with strong gains. After the initial announcement of interest rate cuts and QE expansion, the single currency fell to session lows of 1.0820. However, during the press conference, Mario Draghi said that he doesn't anticipate further rate cuts given the current stance. The Euro quickly recovered off the lows and traded as high as $1.12, posting a two-week high, gaining nearly 1.70% for the day. In the press conference, the ECB President noted that interest rates will remain low for an extended period of time even after the current QE purchases end. While European stocks initially gained on the news, equities fell sharply following the steady rise in the single currency. The German DAX closed lower by 2.31% erasing the gains made earlier in the day including the US equity markets.

Canada industrial capacity declines

The fourth quarter Canadian industrial capacity utilization rate fell as data showed the operating capacity of 81.10% amid declines from the construction, oil and gas extraction sectors. The lower reading came following a revised third quarter print of 81.60%, according to data released by Statistics Canada yesterday. The capacity utilization rate represents a ratio of the actual output to the estimated potential output and serves to measure slack or spare capacity in the economy. Overall, the average spare capacity fell over 1.0% in 2015 after rising 1.50% a year before. USDCAD was trading stronger yesterday as the Greenback rallied strongly to erase the BoC induced gains in the Canadian dollar. In its statement, the Bank of Canada noted that it would wait and assess the fiscal stimulus measures being presented by the Canadian authorities later this month and did not reference the exchange rate of the Canadian dollar which has appreciated strongly for nearly seven weeks.

China inflation rises 2.30% in February

Consumer prices in China surged 2.30% in the month of February compared to a year ago, higher than the forecasted 1.80% and up from 1.80% increase in January. Expectations remain strong that the headline inflation rate might continue to remain strong easing pressure on the PBoC at least for the time being. Food price inflation was the main contributor to the upside surprise, a similar theme which played out with Norway's inflation data as well which surged 3.10% with food inflation being the main driver in consumer prices. While CPI numbers were positive, Producer Prices continued to remain weak. For the month of February, China's PPI fell 4.90% but slower than January's 5.30% decrease. The decline in the PPI marks a fourth consecutive year of Chinese firms cutting prices on goods. Expectations are that the PBoC will likely remain on the sidelines but would continue pursuing an easy monetary policy. While the data did not have any sharp impact on the Yuan, the Shanghai Composite index fell 1.20%.

Canada Unemployment data ahead

Canada's monthly labor statistics are due for release with expectations that the Canadian unemployment rate remained steady at 7.20% while the monthly number of jobs is expected to have increased by 10.2k. Earlier this week, the Bank of Canada left interest rates at 0.50%, unchanged in anticipation of the fiscal stimulus measures being presented by the Canadian authorities later this month. While the Canadian dollar gained on the news, yesterday the Euro managed to pare its losses erasing almost all the gains from the previous day and posted a 9-day high. Canada's new house price index data released yesterday showed gains as the price index advanced 0.10% in January according to Statistics Canada. The data came softly below expectations of a 0.20% gain. On a 12 month basis, new house prices increased 180% matching expectations. Meanwhile capacity utilization rate which measures spare capacity or slack fell to 81.10% in the fourth quarter of 2015, down from a revised 81.60% in the third quarter.