ECB: Deposit floor likely to be dropped today – RBC CM

Elsa Lignos, Senior Currency Strategist at RBC Capital Markets, notes that a poll of 70 analysts by Reuters shows consensus for no action today but an extension to QE by the end of the year, which would have to be coupled with some changes to the purchase programme to expand the universe of eligible assets.

Key Quotes

“Our European rates team looks for the deposit floor to be dropped today, which would mean a rally in short-dated cash products and a kneejerk EUR negative reaction. Recall that at the July meeting Draghi repeated the same line three times: “over the coming months when we have more information, including new staff projections, we’ll be in a better position to reassess the underlying macroeconomic conditions”.

And once again: “If warranted to achieve its objective, the Governing Council will act by using all the instruments available within its mandate.” The July minutes showed that the ECB is concerned about the lack of underlying price pressures and the August flash inflation report will have done little to change that.

Our economists look for the 2017 growth estimate to be lowered as the UK referendum is factored in, and that should have a knock on-effect on inflation. So while consensus might not be looking for an extension to QE today, that may understate the expectations for today’s press conference. As well as a relaxation of the depo rate floor, we are looking for signs that discussions have started on dropping the capital key.

A complete repeat of the July meeting with no such discussions at all would be disappointing—in that case, we would expect to see EUR/USD bounce. Resistance comes in at the recent highs of 1.1368 while there is support at 1.1136 (200dma).”