Euro Could Get a Boost If ECB Takes ‘Liquidity Route’
The European Central Bank may launch a fresh round of stimulus to contain the impact of a possible Greek exit from the euro zone, but the fallout from such a move on the single currency will depend on what route the central bank takes, say experts.
Whether the ECB cuts the benchmark interest rate or offers the region's banking sector cheap loans via another long-term refinancing operation (LTRO) will decide the fate of the euro , Gareth Berry, Forex Strategist at UBS, told CNBC Asia’s “Squawk Box” on Wednesday.
The euro could get a boost if the ECB took the "liquidity route" instead of cutting rates, Berry said, as another dose of cheap loans will help shore up the banking sector and improve overall sentiment for the euro zone.
However, he didn't expect the ECB to take a decision at its next meeting on June 6 until the outcome of fresh Greek electionscalled for mid-June are clearer.
In the absence of any direction from the ECB, forex strategists expect the euro to fall in the near-term.
Berry’s three-month target for the euro is $1.25 but "we may get there sooner."
Rob Rennie, Global Head of Forex Strategy at Westpac bank, said the ECB could downgrade the region's growth forecast further when it meets next month, laying the groundwork for more stimulus. "We've long been targeting a move towards the $1.25-1.26 region and I think that move will happen sooner rather than later," Rennie said.
'Shock & Awe'
Ashraf Laidi, Chief Global Strategist at City Index, said a possible Greek exit from the euro zone called for greater pre-emptive action not just from the ECB but the International Monetary Fund and the European Union collectively.
"The troika must have their own 'shock & awe' plan in place" similar to the U.S. Troubled Asset Relief Program before any planned Greek exit "otherwise we're talking a 400-point euro drop in one day," Laidi said in a comment posted on Twitter.
"If Greece were the only issue, the euro would rise, but 'Grexit' could lead to 'Portugone' and further defections = bad for euro,” Ed Ponsi, Managing Director of Barchetta Capital Management, said on Twitter.
But Westpac's Rennie says the single currency could thrive if the weaker peripherals are stripped away from the common-currency area and as a result "the core of the corpus is worth more."
By CNBC's Sri Jegarajah