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May 10, 2013
Forex Flash: We expect the ECB to pursue further monetary easing measures - Soc Gen
FXstreet.com (Barcelona) - The EUR/USD finished the session down 116 pips at 1.3044. The pair has been stuck in a trading range for quite some time now, but some analysts see numerous reasons to view further declines.
According to Sebastien Galy, Senior Currency Strategist at Soc Gen, “The monetary transmission mechanism has broken down in the euro area. Worse than that, the disintermediation function of banks also appears to have taken a big hit. Negative interest rates could actually worsen the problem. They will not boost lending if there is weak demand for loans and/or banks are prepared to pay for safe deposits with the ECB rather than make loans that they fear will not be repaid”
He went on comment, “Furthermore, negative rates would hurt the profitability of financial institutions, unless they are accompanied by a material steepening of the yield curve. As such, it is no surprise that many market participants took the reference to negative rates as an indirect verbal intervention to weaken the euro. Verbal intervention or not, the most direct and dependable mechanism for negative rates to translate into higher economic activity is through a lower exchange rate boosting net exports. We expect the ECB to pursue further monetary easing measures that will translate into a weaker exchange rate, wittingly or not. We reiterate our Currency Wars and short euro basket trades”
According to Sebastien Galy, Senior Currency Strategist at Soc Gen, “The monetary transmission mechanism has broken down in the euro area. Worse than that, the disintermediation function of banks also appears to have taken a big hit. Negative interest rates could actually worsen the problem. They will not boost lending if there is weak demand for loans and/or banks are prepared to pay for safe deposits with the ECB rather than make loans that they fear will not be repaid”
He went on comment, “Furthermore, negative rates would hurt the profitability of financial institutions, unless they are accompanied by a material steepening of the yield curve. As such, it is no surprise that many market participants took the reference to negative rates as an indirect verbal intervention to weaken the euro. Verbal intervention or not, the most direct and dependable mechanism for negative rates to translate into higher economic activity is through a lower exchange rate boosting net exports. We expect the ECB to pursue further monetary easing measures that will translate into a weaker exchange rate, wittingly or not. We reiterate our Currency Wars and short euro basket trades”