Forex Flash: Rethinking the terminal ECB rate – Societe Generale

By | January 17, 2013 AAA (Barcelona) - Kit Juckes, Global Head of Currency Strategy at Societe Generale notes that a dramatic rise in short dated rates can lift the Euro, particularly in Europe.

He comments that it has been a week since Mario Draghi intimated that for now the ECB is 'done', and the front end of the European rates market reacted slowly at first, but increasingly sharply in the last couple of days. He adds, "As our rates strategy team puts it, the market is re-pricing the ECB's terminal rate. The prospect of repayment on the ECB's 3yr LTRO loans (from January 30), is also seen as a potential source of liquidity tightening in the European money market."

Juckes continues to explain that the sharpness of the move at the front end of the Euro curve is a decent guide to what can happen in USD and GBP curves when the policy cycle turns around. He writes, "We don't need the central bank to tighten, or to reverse QE, we just need an indication of a change in general direction. When that happens in the US, it will be supportive for the dollar but that's for another day - for now, we are seeing capitulation in the Euro rates market that is already partially mirrored by moves in Euro FX crosses."

In summary, he notes that EURJPY has been the biggest mover and EURCHF the biggest mover relative to recent ranges. However, he sees breaks higher in EURGBP, EURUSD, EURNOK and EURSEK. Elsewhere, in the CEEMEA space, Juckes feels that Euro strength can trigger position adjustments across the board.

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