Don't Diss the European Central Bank


Investors yawned when the European Central Bank cut interest rates last week. This strategist says they were wrong.

Were you ready when the European Central Bank cut interest rates on July 5? If so, you had lots of company. That 25-basis-point move was so widely expected, you could almost feel the collective shrug.

The currency strategists at Deutsche Bank have other ideas.

"The marginal impact of the latest cut is likely to be much larger than previous easings," they wrote in a note to clients. "This is because returns in money market instruments and band depos may turn negative. We think this, combined with the very large amount of excess liquidity in the Eurosystem, will have a larger marginal impact on investment allocation decisions and could trigger greater capital outflows."

In case that's not enough to make euro investors sit up and take notice, the strategists also point out that the ECB has now demonstrated a more aggressive easing bias than the Federal Reserve, the Bank of England or the Bank of Japan.

The Deutsche Bank strategists expect that the ECB's rate cut, combined with a decline in the optimism that followed the European Union summit, will send the euro lower against the dollar. How low? Even though the dollar "remains highly correlated to risk appetite so a turn in data surprises, currently at extremes, is a headwind to additional strength," the strategists anticipate a euro-dollar move to 1.20 during the summer months.



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