A negative deposit rate is valid from today; EUR/USD fundamental analysis

welcome,

 

Recall that the decision of the European Central Bank on June 5 was introduced negative deposit rate (-0.1%), which takes effect from today.

 

The details of who will be concern we read in the communication of the Bank:

 

"This change will come into effect on 11 June 2014, together with the changes to the interest rates on the main refinancing operations and on the marginal lending facility. The negative deposit facility interest rate will also apply to: (i) banks’ average reserve holdings in excess of the minimum reserve requirements; (ii) government deposits held with the Eurosystem that exceed certain thresholds that will be set in the relevant Guideline to be published by 7 June; (iii) Eurosystem reserve management services accounts if not currently remunerated; (iv) participants’ account balances in TARGET2; (v) non-Eurosystem NCB balances (overnight deposits) held in TARGET2; and (vi) other accounts held by third parties with Eurosystem central banks when stipulated that they are not currently remunerated or are remunerated at the deposit facility rate."

 

Worth a look at the amount of funds that are deposited at the ECB at an interest rate of overnight and that the amount will fall, or maybe even the banks do not take over reduction.

pic. 1. Euro LIBOR, 2014-06-11

pic. 2. USD LIBOR, 2014-06-11

 

3M Libor EUR and USD rates are close to each other and soon keeping deposits in euro on the interbank market will cease to be viable.

 

Announced the cessation of sterilization SMP program by the ECB is excess liquidity in the market to raise up to 250 billion euros - says bank Credit Agricole.

Currently excess liquidity at the ECB is 120 billion euros. The increase in excess liquidity should further reduce the cost of the euro money market, and should result in a decrease in Euribor and Libor rates for the euro. What should have an impact on the behavior of the EUR/USD.

chart 1. The amount of deposited funds on the overnight rate, 2014-06-09

In summary, the overall weakness of the euro also observed an increasing potential for the USD, due to a systematically increasing Interest rate contracts (IRS, FRA) and a significant yields increase of U.S. bonds (especially short-term). Moreover also begins to grow LIBOR for USD, which can slowly encourage investors to hold U.S. currency in the money market.

You should also remember that next week begins a committee meeting of the FOMC.

More and more voices in the market that the Fed is slightly horrified size of its balance sheet. Recall That The Fed's asset purchases have expanded its balance sheet to 25 percent of gross domestic product from 6 percent at the start of 2007. <bloomberg link>.

There is also information about the possibilities by The FOMC accelerate the pace of QE reductions to $15 billion. <latest minutes link>.

Assuming that the above information is to follow through on it is likely that future weeks should be the strengthening of the U.S. dollar.



best regards,
oscarjp