Commodity Trade Mantra

ECB Rate Cut – Possible on deepening Debt Crisis

ECB Euro Trading

ECB may Cut Rate on deepening Debt Crisis

ECB rate cut expectations have economists saying there is enough room for a rate cut. The European Central Bank (ECB) may edge closer to cutting interest rates to a historic low as the debt crisis tightens its grip on the euro economy and threatens to hurt global growth. With European governments struggling to fix a crisis that’s engulfing Spain and could force Greece out of the euro, pressure is mounting on the ECB to lower rates and introduce more liquidity support for banks. The ECB is expected to indicate a readiness to cut interest rates as soon as next month but hold back from policy moves, after a Group of Seven, emergency conference call on Tuesday failed to produce any concrete solution.

Large speculators yet hold a record net-short position in euro futures but surely some reduction of short-euro positions can be expected before the Greek elections. A subsequent win by the pro-bailout parties in Greece also could lead to heavy short covering in the Euro. We expect Greece to remain with the Euro & similarly Spain & Italy. The European Union authorities will eventually come up with programs that preserve monetary union, although the euro is likely to remain under pressure in the meantime. The Euro could rebound against the US dollar later in the year as worries shift from European debt toU.S.debt. We have repeatedly alerted of the US dollar eventually getting crushed.

The Group of Seven nations yesterday agreed to coordinate their response to Europe’s turmoil, which has tipped at least eight of the 17 euro-area economies into recession and damped European demand for foreign goods. ECB President Mario Draghi, who said last week the monetary union is “unsustainable” in its current form, could choose to withhold further stimulus until governments do more to tackle the causes of the crisis.

G-7 finance ministers and central bankers discussed “progress toward financial and fiscal union in Europe” on a conference call yesterday that focused on Spain and Greece. The Reserve Bank of Australia cited Europe’s crisis when cutting its benchmark rate yesterday by a quarter point to 3.5 percent, while the Bank of Canada held its key rate at 1%. Bank of England (BoE) policy makers meet tomorrow amid speculation they could increase asset purchases after the U.K. slipped back into recession.

ECB officials, convening a day earlier than usual due to a public holiday in some German states tomorrow, will announce their rate decision at 1:45 p.m. Draghi holds a press conference 45 minutes later, at which he will unveil the central bank’s latest forecasts for the euro area. ECB in March predicted an economic contraction of 0.1% for 2012 and growth of 1.1% for 2013. Inflation was projected to average at 2.4% this year and 1.6% next. Economists said they expect modest downward revisions to both the inflation and growth outlooks. Economists also said Draghi is likely to announce today an extension of the ECB’s policy of full allotment in its refinancing operations, which has been the main plank of its crisis response since 2008.

U.S. President Barack Obama has criticized European governments for not doing enough to arrest the crisis, now in its third year. The Euro has plunged to a two- year low against the dollar & Investor concern about political inaction drove Europe’s Stoxx 600 Index (SXXP) down 8% last month, fully erasing gains this year.

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