Euro dips as ECB sets sights on deeper negative rates

LONDON (Reuters): Expectations for a fresh shot of stimulus from the European Central Bank on Thursday pushed down the euro and government bond yields in the morning, after New Zealand set the bar high with a surprise rate cut that sent its currency tumbling.

Europe’s main stock markets got off to a solid start, with London’s FTSE, the DAX in Frankfurt and the CAC40 in Paris, adding between 0.1 and 0.3% to the 13% they have gained over the last month.

The euro was down at $1.0970, while euro zone bond yields from Germany to Greece were slightly lower as traders did some final buying ahead of the ECB’s 1245 GMT interest rate decision and 1330 GMT news conference by Governor Mario Draghi.

Having disappointed markets with an unspectacular package of measures in December, the bank’s policymakers have tried to avoid stirring up speculation ahead of this meeting – although that hasn’t stopped eager economists.

The latest Reuters poll shows bets are on at least another 10 basis points being sliced off its already negative -0.3% deposit rate and the bank adding another 10 billion euros a month to its 1.5 trillion euro bond-buying program.

The ECB has a huge range of options, though, from scrapping the lower price limit it is prepared to buy at, purchasing more risky types of asset backed securities to tiering its negative rates and being more targeted with its government bond buys.

“The market is a bit wishy-washy, not a whole lot is priced in because of the doubts over whether they (ECB) can really deliver,” said Saxo bank head of FX strategy John Hardy.

“So if you get some real innovation from the ECB you will see a big reaction from the euro. Especially if they can change the capital key (country-by-country purchase percentages) or there are new measures geared at helping banks’ balance sheets.”

Oil prices, one of the main drivers behind the rapid fall in inflation which has been such a headache for central banks like the ECB, were steady in early European trading, with benchmark Brent futures LCOc1 holding at just over $40 a barrel.

The ECB will also release new economic forecasts later. They will not have captured the recent rebound in oil so are likely to show inflation this year at zero, or maybe even negative, which would be the first time ever they have done so for a year.

The big surprise in Asia overnight came from New Zealand’s central bank, which pre-empted the ECB by cutting its main interest rate to a record low 2.25%. The Kiwi dollar tumbled to $0.6618 as Reserve Bank of New Zealand Governor Graeme Wheeler cited China as a major risk to the bank’s outlook for economic growth and inflation, reflecting global concerns over a slowdown in the world’s second-biggest economy.

“If China had a very significant and prolonged devaluation, it would in essence spread deflation around the world,” Wheeler told reporters, adding that China was building up a number of serious imbalances.

Asian stocks edged up meanwhile, encouraged by the previous day’s rally in crude prices and expectations that an aggressive showing from the ECB later could see dovish reactions from the Bank of Japan, Fed, Swiss National Bank and Bank of England which all meet over the next week and a bit.