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ECB easing creates new world for euro zone border currencies
June 6, 2014 / 1:25 PM / 3 years ago

ECB easing creates new world for euro zone border currencies

LONDON, June 6 (Reuters) - The European Central Bank’s rate cuts and new bank-lending programme have broad implications for other central banks in Europe seeking to steer non-euro currencies.

With its main interest rate at just 0.15 percent and negative rates on overnight deposits, the ECB’s action is likely to spur more euro-funded carry trades - where investors borrow in a cheaper currency to buy a higher-yielding one.

Here is a look at what may go on along the euro zone’s borders:


One currency that could steal the limelight in carry trades is the British pound. The euro fell to an 18-month low against the pound of 80.64 pence on Thursday and speculators in the options market are betting that the pair is likely to weaken in coming months.

Amongst the big four central banks - ECB, Bank of England, U.S. Federal Reserve and Bank of Japan - investors expect the BoE to be the first to raise interest rates from near zero levels currently.

Combined - and with the pound as one of the world’s most liquid currencies - this suggests that large investors are likely to buy sterling against the euro.


The ECB moves are expected to make Switzerland relatively more attractive as a destination for money, potentially challenging the Swiss National Bank’s 1.20 per euro cap on the franc.

The SNB capped the franc after investors fleeing the euro zone debt crisis bid the safe-haven unit up to record levels. It has not had to defend the limit by selling francs in more than a year.

But the franc is trading near a one-month high against the euro at 1.2171 francs per euro, with near-term options pricing indicating speculators are increasingly biased towards more franc strength in the coming few weeks.


The ECB’s move has raised pressure on Sweden to cut rates as early as July.

The Swedish economy unexpectedly contracted in the first quarter and the government is already concerned that a firming crown, a likely outcome of an increased rate differential with the euro zone, would thwart the still fragile recovery, particularly in its vital export sector.

Finance Minister Anders Borg said after the ECB move that the crown was too strong, adding “Now that the ECB (has gone) ahead with wide, unconventional measures, it is important to send signals that we do not consider it justified for the exchange rate to strengthen.”


The Danish central bank has had a policy for most of the euro zone’s lifetime of matching what the ECB does rate-wise. But it held rates steady this time and appears little influenced by the ECB’s move for now.

The correlation between the two benchmark rates was broken when it hiked this spring and the bank is expected to keep its focus on the national currency rather than the euro for a while.

Jan Storup Nielsen, senior analyst at Nordea, said the crown had been considered a bit too weak recently so the central bank would have been pleased that the ECB moves strengthened it slightly.


Norway’s crown is more detached from the euro than many of the adjacent currencies because of its dollar-based oil export income.

As a result, the central Norges Bank will not be under any immediate pressure to cut, especially as that would further fuel an already overvalued property market.

But the bank has already warned that international rates are lower than it saw just months ago and analysts said this may force the bank to pare back its expectations on when it will next move.


The zloty has gained nearly 2 percent versus the euro over the past three weeks because of the diverging interest rate paths in Poland and the euro zone.

The National Bank of Poland is reluctant to cut rates and has said it will keep them on hold at the current 2.50 percent until the end of the third quarter of this year.

This means, however, that Poland now has one of the highest benchmark rates in the region, with Hungary (which has been cutting) at 2.40 percent, the Czech Republic’s rate at almost zero and the euro zone now at 0.15 percent.

NBP Governor Marek Belka said a week before the ECB move that a rate cut was “a low probability”, but his language was less stridently opposed than it has been.


The Hungarian central bank has cut its rates every month since August 2012, so the ECB’s loose stance could encourage it to continue.

The main rate is still at 2.4 percent so the differential remains highly supportive.


The Czech central bank’s commitment to keep the crown from firming above the 27 per euro level - an effective floor - at least into early 2015, meant that there was no immediate movement of any note after the ECB move.

The crown remains inside a narrow band, suggesting the market is taking the central bank at its word that it will step in if it has to. The central bank has not physically intervened in the market since an initial round last November. (Reporting by Anirban Nag, Alice Baghdjian, Balazs Koranyi, Marcin Goettig, Sandor Peto and Jan Lopatka. Writing by Jeremy Gaunt; Editing by Susan Fenton)

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