Intraday Market Thoughts

ECB Considers Interest Rate Cap

by Patrik Urban
Aug 20, 2012 13:27

ECB could limit periphery yields; Bundesbank confirms its opposition to ECB bond purchases; Eurozone construction output falls. US session will bring only Chicago FED national activity index. See the latest on those Premium Insights. A new version is due later today.

The greenback trades within narrow ranges but with a firmer tone. European equities are mixed between -0.1% and +0.5%. CAD leads while EUR lags. EURUSD fell back to 1.2320s

Reuters reports that the ECB may be considering an interest rate cap on Eurozone country's bonds. It would buy those bonds that would reach certain premium over German bonds. This step would, at least in theory, discourage speculators from pushing yields above the level that the ECB considers appropriate and it would ensure that interest rates in the euro area would not diverge significantly. Sources said that it is to be decided during the September meeting. The ECB declined to comment on the story. Spanish and Italian 10 year yields continue to decline, currently trading around 6.21% and 5.74%.

In its monthly report, the Bundesbank said that the Eurozone crisis has notably increased the risks to German outlook and reiterated its oppositions to new ECB bond purchases. It further noted that the new role for the ECB as a bank supervisor could conflict with its price stability mandate.

There was only one European release today. Eurozone construction output declined additional 0.5% in June after a 0.2% fall in May m/m and on annual basis output declined 2.8%. Construction contracted for the third month in a row with largest declines seen in Germany and Netherlands.

US data is limited to Chicago FED national activity index at 8:30 am that reached -0.15 in June. No forecasts are provided for this index and market impact is usually limited.

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