[MARKET REPORT] ECB scores a first: Negative deposit rates

For the past month, the financial markets had been eagerly awaiting the latest European Central Bank (ECB) interest rate decision and it certainly delivered. The ECB introduced a number of new policy measures, including cutting interest rates to a new record low of 0.15%, a €400bn fund to encourage bank lending and the introduction of negative deposit rates. The ECB is the first major bank to introduce negative deposit rates, and this basically means that banks will now be charging to keep money within their bank. ECB President, Mario Draghi hopes the introduction of negative deposit rates will entice consumer lending and prevent the EU from entering dangerous deflation territory.

The markets reacted erratically to the ECB’s new policy measures. At the time of announcement, the EURUSD fell to its lowest valuation of 2014. However, when it was confirmed that the ECB were not yet implementing their own Quantitative Easing program, the EURUSD quickly regained these losses. After the ECB interest rate decision, Draghi delivered a dovish press conference where he threatened that the ECB is far from finished adding ECB stimulus. With the exception of French Jobless Claims, the upcoming week is low in volume with economic releases from the EU, and it looks like the bears are set to dominate the future direction of the EURUSD.

The other major news was the latest US employment report, which continues to signal that the US economy is gaining momentum. Although the US unemployment rate stayed unchanged at 6.3%, the US economy created 217,000 jobs in May. This was the fourth consecutive month that the US economy added more than 200,000 jobs to their payroll, and the first time this had been achieved in over 14 years. For the past year, 2.4 million jobs have been created by the United States economy.

Overall, the US jobs report was seen positively. The main improvement noted was the need for more construction jobs to be created in the coming months. Only 6,000 construction jobs were created in May.

In reference to average wage growth, wages increased by 2.1% on the year before. Analysts feel a 3% wage increase is required for consumer expenditure to accelerate. This is particularly important for the US economy, because consumer expenditure accounts for 70% of the overall US GDP.

In regards to the Japanese economy, Japan’s latest GDP figure was revised up to 1.6%. This had little effect on the financial markets though, with analysts still trying to mule over the accuracy of Japan’s latest inflation data. Last month, Japanese consumer prices increased to their fastest pace in 23 years, at an annualized 3.2% growth level.

On reflection of the CPI, it was apparent that a sales tax recently implemented in April encouraged additional consumer expenditure. Despite the sales tax encouraging consumers to purchase, household spending actually contracted by an annualized 4.6%. The IMF have already indicated that this CPI release is not sustainable and Japanese inflation will not consistently achieve the BoJ’s 2% target until 2017 at the earliest. Furthermore, it is now feared that the sales tax will lead to weaker than expected upcoming GDP data.

Finally, the latest Australian GDP release surprised, with GDP expanding by 1.1% for the past three months. However, there were raised eyebrows over mining exports that accounted for 0.9% of this increase.

It has long been advised that the Australian economy needs to slow down their over reliance on mining and exports. In the future, it has been identified that the Australian economy must focus on domestic consumption, such as construction and business investment. This will likely put increased pressure on this week’s Australian metric releases. On Tuesday, both business and consumer confidence are released and on Wednesday, the latest unemployment data is announced.

What to watch this week

The main news for the upcoming week is likely to be focused on the RBNZ’s interest rate decision on Wednesday evening. The majority of economists are expecting that the RBNZ are set to raise rates for the third time this year, but it is still possible that an interest rate hike could be delayed this month. The RBNZ have blamed recent poor economic data on a higher valued NZDUSD; and if they do raise rates on Wednesday evening, a dovish statement threatening the future use of currency intervention may be used in the hope of deterring buyers away from the Kiwi.

We are also expecting economic data from the United Kingdom this week. On Tuesday, the latest Manufacturing and Industrial production figures are expected to showcase further expansion. However, volatility is more likely to occur during the release of the latest UK unemployment rate on Wednesday morning. The UK unemployment rate is already within the BoE target to raising interest rates, but they are in no hurry to raise rates. Therefore, GBPUSD losses is a possibility for this Wednesday.

We are not expecting any major news from the United States this week, with the exception of the latest Small Business Optimism Indicator on Tuesday, and May’s Advance Retail Sales being released on Thursday.

*Ahmad is the chief market Analyst at FXTM.