Filed Under:
Forex pairs in this Article » EUR/USD
FXstreet.com (Barcelona) - Sebastien Galy, Senior FX Strategist at Societe Generale feels that should the ECB move to negative interest rates, EUR foreign reserves would initially gain from a valuation effect on their holdings, generally below 1 year of maturity.

However, he adds that they would quickly be penalised as they roll over their foreign reserves at the new rate. Consequently, he notes that foreign reserves have two likely alternatives. Firstly, they would have to increase the duration taking advantage of a repricing higher of the EUR curve or degrade the credit quality of their foreign reserves. Secondly, the selling of some of their EUR reserves. In an environment of portfolio outflows out of EM, Galy feels that it may be tempting to sell EUR/USD to intervene in their domestic currency. He wortes, “This would accelerate the move lower in EUR/USD. The logical decision may be to use EUR/USD options to benefit from this eventual spot activity. Overall, the possible move towards negative interest rate should lead to a lower EUR, as shown by the example of Denmark.”
comments powered by Disqus