Rate cuts as large as 175 bp have been seen from central banks this week as they struggle to ward off the looming risk of deflation. The ECB’s 75 bp cut yesterday is looking a bit skimpy this morning in the wake of the collapse in German manufacturing orders seen this morning. The euro is suffering as a result for fear that the ECB has fallen behind the curve which could delay any potential recovery in Europe should the global economy ever pull out of its dive.
Also weighing on the euro were reports overnight that Japan is mulling a tax break for for domestic firms to repatriate profits held overseas. This could spawn big inflows into Japan as roughly $180 bln in profits are reportedly being parked outside Japan to avoid its onerous 40% corporate tax rate. With EUR/JPY already under pressure from risk aversion, a macro shift like a tax break could send us tumbling once again. Sean Lee’s 100.00 prediction for EUR/JPY made on FX Hub last summer is looking better every day.
Other big stories overnight include Paulson’s tete-a-tete in Beijing and moves by the UK to prepare for the potential to undertake quantitative ease.