ECB imposes a number of conditions on banks. Fundamental analysis for 14.05.2014
14.05.2014
A relatively quiet news background allowed the Eurodollar to go into a correction. The small amount of statistics were as expected, for example the European industrial production slipped by 0.3%. The updated information on the German inflation also did not present any surprises - as compared to March, the prices fell by 0.2%, but during the annual period, a growth rate of 1.3% can be observed.
Given that the average for the euro area Inflation stands at 0.7%, it becomes clear why Berlin is so wary of any incentive programs - if the ECB starts pumping too much liquidity into the economy, then the German inflation may start to grow. However, the monthly price declines are likely forcing the Bundesbank to support the easing of the ECB policies in June.
Information is emerging that within the walls of the ECB they are working on conditions for the new program of loans to banks, formerly known as the LTRO. Previously the regulator did not put any conditions on the use of banks borrowed funds. The implication was that the banks will buy bonds on the bond market, earning the interest rate differential (between the interest rate on the bonds and the ECB's three-year loan rate).
Later it became clear that not all funds have been used in this direction - many banks simply took the opportunity to attract cheap money with a view to patch the "holes" in their balance sheets. As a reminder, during the crisis there was a real flurry of defaults on loans, so the extra liquidity came in handy. In general, this became the main reason for the very small decrease in rates on the bond market.
Now the ECB can run a program through special mechanisms to get banks to lend the raised funds to small and medium businesses. If the program will be rolled out in this format, the money will go into the real economy, and the ECB will be able to kill three birds with one stone - to give incentive to the growth of inflation, to provide access to finance for small businesses, which will then lead to an improvement in the employment situation.
Generally, if ECB really launch the third round of LTRO in June, then the Eurodollar can go into a new bearish trend. Some stimulating action from the regulator has been awaited for some time, and therefore when these actions start the market reaction will be adequate. In addition, amid rumours of support for these measures by the Bundesbank, will be extremely difficult to return to growth - is likely to await us brief correction.
RoboForex Analytical Department
Given that the average for the euro area Inflation stands at 0.7%, it becomes clear why Berlin is so wary of any incentive programs - if the ECB starts pumping too much liquidity into the economy, then the German inflation may start to grow. However, the monthly price declines are likely forcing the Bundesbank to support the easing of the ECB policies in June.
Information is emerging that within the walls of the ECB they are working on conditions for the new program of loans to banks, formerly known as the LTRO. Previously the regulator did not put any conditions on the use of banks borrowed funds. The implication was that the banks will buy bonds on the bond market, earning the interest rate differential (between the interest rate on the bonds and the ECB's three-year loan rate).
Later it became clear that not all funds have been used in this direction - many banks simply took the opportunity to attract cheap money with a view to patch the "holes" in their balance sheets. As a reminder, during the crisis there was a real flurry of defaults on loans, so the extra liquidity came in handy. In general, this became the main reason for the very small decrease in rates on the bond market.
Now the ECB can run a program through special mechanisms to get banks to lend the raised funds to small and medium businesses. If the program will be rolled out in this format, the money will go into the real economy, and the ECB will be able to kill three birds with one stone - to give incentive to the growth of inflation, to provide access to finance for small businesses, which will then lead to an improvement in the employment situation.
Generally, if ECB really launch the third round of LTRO in June, then the Eurodollar can go into a new bearish trend. Some stimulating action from the regulator has been awaited for some time, and therefore when these actions start the market reaction will be adequate. In addition, amid rumours of support for these measures by the Bundesbank, will be extremely difficult to return to growth - is likely to await us brief correction.
RoboForex Analytical Department
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