Danske Markets predicts 0% ECB rate and $/€ at 130

Danske Markets, part of Danske Bank, said in a note that the bond market pressure yesterday on debt issued by AAA rated countries such as France, Austria and the Netherlands suggested Europe’s financial crisis could run for some time, and likely would lead the ECB to introduce a de facto zero rate policy come January.

“In our view the crisis has now escalated to a new dangerous level, as bond yields from triple-A countries like France, Austria, the Netherlands, Finland and Austria also rose dramatically yesterday. The market is now pricing that e.g. France and Austria will lose their top-rating. French and Austrian 10y yields are now more than twice as high as the German equivalent, trading with a spread of 194bp and 184bp to Germany, respectively,” Danske Markets wrote.

It added: “Spanish bonds are now in the danger zone for a haircut from LCH clearnet. It was new margin requirements from LCH that initially pushed Italian bonds above 7% last week.”

Spain goes to the polls this coming weekend, with Reuters reporting that anger over the country’s economic situation looks set to put the centre-right People’s Party in power with a mandate to cut government spending. Recent opinion polls put the party, led by Mariano Rajoy, on a 17 point lead over the Socialist party – suggesting the biggest margin win for a right-of-centre party since the 1970s, when democracy returned to Spain following the dictatorship of Francisco Franco.

Danske Market’s prediction of future ECB rate policy is the result of new data pointing to a contraction in the eurozone economy.

Danske Markets writes: “The sharp drop in eurozone industrial production in September reported on Monday and weak PMIs reported last week indicate that expansion was already slowing dramatically going into Q4, As a consequence of the weak growth outlook we changed our interest rate forecast yesterday. We now expect the ECB to cut rates in both December and January, which will for the first time ever bring the refi-rate below 1%. We are now basically calling for zero rates in the eurozone as the important deposit rate is expected to be lowered to just 0.25%. The weak growth outlook and de facto zero rates are also expected to weigh on the euro, and we have lowered our €/$ forecast to 1.30 on a 3M horizon.”

“Before the Swiss National Bank introduced the 1.20 minimum target in €/CHF the franc would have strengthened significantly on a day like yesterday. However, growing speculation that the SNB might lift the target as early as December kept €/CHF well supported close to the 1.24-level. Hence, it leaves the market with JPY as the only true safe-haven currency. In that respect the Bank of Japan did little to mitigate the safe-haven flows at today.s monetary policy meeting. As expected the policy board kept its zero rate policy unchanged and cut its economic assessment due to global slowdown fears. However, it did not introduce new measures to fight the appreciating yen. We forecast that BoJ will have to accept $/JPY sliding to a record low 74 over the next six months.”


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