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1 Nov 2013
Flash: ECB can no longer ignore deflation risk, implications mixed for EUR- RBS
FXstreet.com (Barcelona) - In the Eurozone, the dreaded risk of deflation is much higher than inflation, and higher than any other country, says Greg Gibss, Strategist at RBS, adding that the ECB can no longer ignore that reality.
Key Quotes
"But what is the ECB going to do about it? The answer is not much because it hasn't got the institutional framework to take the necessary policy action. Its reactions are likely to be meek, they may attempt to sound confident that they will work, continuing a pattern of appearing behind the curve."
"The implications are mixed for the EUR. While the sovereign crisis remains subdued, it will result in rising real yields and rising trade surplus, both factors that will intensify the deflation risk and push up the EUR. However, deflation will also lead to further deterioration of government finances and thus at some point reignite the sovereign and financial crisis; at which point there are mixed implications for the EUR, but more likely than not they start with a period of decline on capital flight."
"The EUR is down on the CPI data release (headline CPI 0.7%, core 0.8%), because the market presumes the ECB will take at least some policy action and may attempt to talk down the EUR. The market is probably somewhat long and it could begin to worry about sovereign risk returning, even though there was no evidence of that overnight with gains in periphery bonds."
Key Quotes
"But what is the ECB going to do about it? The answer is not much because it hasn't got the institutional framework to take the necessary policy action. Its reactions are likely to be meek, they may attempt to sound confident that they will work, continuing a pattern of appearing behind the curve."
"The implications are mixed for the EUR. While the sovereign crisis remains subdued, it will result in rising real yields and rising trade surplus, both factors that will intensify the deflation risk and push up the EUR. However, deflation will also lead to further deterioration of government finances and thus at some point reignite the sovereign and financial crisis; at which point there are mixed implications for the EUR, but more likely than not they start with a period of decline on capital flight."
"The EUR is down on the CPI data release (headline CPI 0.7%, core 0.8%), because the market presumes the ECB will take at least some policy action and may attempt to talk down the EUR. The market is probably somewhat long and it could begin to worry about sovereign risk returning, even though there was no evidence of that overnight with gains in periphery bonds."