'Whatever stimulus method the ECB uses, initial reaction from the Euro will likely be a negative one' - Ilya Spivak, DailyFX

   Ilya
Spivak

PROFILE:
• Current Job:  Currency Analyst at DailyFX.
• Career: He holds degrees in Economics and International Relations from the University of California.

View profile at FXStreet

Ilya Spivak applies a global macro approach his analysis, taking a longer-term view on investing in the G10 currencies that often incorporates cross-market relationships and geopolitics. Ilya’s research has appeared on CNN Money, Reuters and Bloomberg News. Before DailyFX, Ilya spent a number of years in FX Sales and as a Researcher at the Center for International Trade Development. He holds degrees in Economics and International Relations from the University of California. Ilya authors a number of regular articles for DailyFX.com.

Do you expect the EU to stand firm against Russia's intents to destabilize the situation in Ukraine? Do you believe that Europe's response so far has been effective? Is it possible for Europe to completely stop relying on gas supplies from Russia?

From a trading perspective, the crisis in the Ukraine has had relatively modest impact on the financial markets. Indeed, mentions of “Ukraine” in the media (as tracked by Bloomberg) have been trending lower since early March alongside a dramatic pullback in natural gas prices. This suggests investors are fairly sanguine about the implications for whatever actions are taken by the antagonists on the different sides of the Ukraine fiasco as well as its implications for the near-term gas supply/demand picture. This calm demeanor may quickly turn to risk aversion if the situation markedly deteriorates, but gauging the probability of such a scenario is ultimately little more than a guessing game.

What are the pros and cons of ECB's potential implementation of a QE program in the Eurozone?

Evaluating the pros and cons of an ECB stimulus effort is premature for now since we do not yet know what form it will take. Importantly, the ECB itself is likely unsure of which route to take at this stage while it waits for the outcome of the Asset Quality Review (AQR) to reveal where the apparent pitfalls in policy transmission are hiding. Lending to the real economy has floundered while borrowing costs in the interbank are lower than the ECB’s own benchmark, and the central bank will need to either repair or circumvent this disconnect with whatever delivery mechanism for stimulus it chooses. From a trading perspective, the bottom line is that whatever method is ultimately used, the initial reaction from the Euro is likely to be a negative one.

Do you expect the ECB officials to manage to talk the euro down or will 1.40 be the next target? If so, when could that happen in your opinion?

ECB officials’ verbal intervention efforts have been mildly successful this far and may continue to be so in the near term while the AQR is complete. There are only 6 policy meetings between now and the time the ECB takes over as the Eurozone’s banking regular, by which point the AQR will be done and its findings likely in the process of being implemented. It seems manageable to incrementally massage rhetoric toward the dovish side of the equation to keep easing bets alive and thereby contain the Euro over that period. Economic news-flow will be instrumental in deciding whether the single currency really starts to build downward momentum, with particular focus on CPI outcomes. Deepening disinflation will bolster stimulus expansion bets, amplifying the ECB’s jawboning.