See ECB cutting deposit rates by 10 bps, increasing QE: Experts

Khoon Goh, Senior F-X Strategist, ANZ Research and Hartmut Issel, Head Equity & Credit APAC; Chief Investment Office WM, UBS in an interview to CNBC-TV18 spoke on their expectations from European Central Bank and its impact on the currencies.Issel says he expects a 10 basis point cut in key deposit rates. However, according to him the world is more focused on whether there will be extension of current 60 billion euros quantitative easing (QE). He sees another 10-20 billion euros being added to that. If more ECB stimulus comes through then it would bring out a positive reaction and would put downward pressure on the euro, he says.According to Goh, the ECB president Draghi needs to deliver beyond market expectation if wants to see the euro down. However, if he disappoints euro will rally, says Goh.Analysts polled by Reuters expect the ECB to cut its deposit rate to -0.4 percent from -0.3 percent, charging banks more for keeping their cash with the bank overnight. They also see a 60 percent chance the ECB will raise its monthly asset purchases, probably by 10 billion euros to 70 billion euros a month. Below is the transcript of Khoon Goh and Hartmut Issel’s interview with Ekta Batra and Anuj Singhal on CNBC-TV18. Ekta: What is the expectation from then European Central Bank (ECB) today? Issel: Where everybody pretty much reads or consensus, if you will is a 10 basis point further cut to the key rates, deposit rates. And then there is more division on whether there will be an extension of the current 60 billion quantitative easing (QE). We think that is likely probably, 10-20 billion per month on top of what we are already seeing, but more important will also be, especially since we more and more feel also what the negative effects can be of negative rates on the banks, that they can be creative and maybe other measures. So, what I could think of maybe is to really also venture out into corporate bond buying. It would at least be an optional alternative or also to really ramp up more bank friendly measures or also these cheap funding measures that also bring up the ECB’s balance sheet, but do it in a more bank friendly way. So, the more you see of that, the more positive the reaction would be. Anuj: What is your call on the global currency equation right now especially on the dollar-euro? Goh: For the euro, it really depends on what the ECB delivers today. The markets are already expecting them to do quite a bit and that is already priced in into the euro which is why the euro really struggles to be on a 1.10. So, ECB president, Draghi really needs to deliver beyond market expectations if he really wants to get the euro down. As we have seen with the bank of Japan in late January when we introduced negative interest rates, monetary policy has reached a stage now where it is actually pretty hard to ease policy and expect your currency to go down. So, this is where the euro response will be very fascinating. If Draghi disappoints like he did in December last year, we are going to see the euro rally. Ekta: So, you are possibly going to see the euro rally if in case Draghi does not meet the market expectations at this point. If we shift focus from the euro to emerging market currencies, including the rupee, what is you expectation at least in the near-term? We have been quite see-sawing in the past couple of weeks. Now we are near one week highs for the rupee. A: Emerging markets have received quite a lot of inflows lately as first of all, with Chinese policy makers stabilising the renminbi and as the US economic data has recovered and yet, the Fed does not look like they will be hiking anytime soon, we are seeing risk-on sentiment coming back in. So, we are seeing a lot of inflows coming back into emerging markets, into India as well. That is why the Sensex has done well and has helped to support the Indian rupee. Near-term we will probably see a bit of risk on in carry trade bets being put on which will be very supportive of the rupee, particularly if the ECB engineers even more negative rates. But, we are probably good for another month or so of this risk on and positivity for emerging market assets.