FXStreet (Guatemala) - Analysts at Rabobank explained that for months there has been speculation as to what reaction a negative deposit rate from the ECB would have.

Key Quotes:

“It is still very early days the past couple of sessions have offered a little insight”.

“Unsurprisingly overnight deposits at the ECB plunged to their lowest level since 2011 on the first day the negative rate took effect. Deposits by Eurozone banks totalled a meagre EUR13.6 bln down EUR25 bln from the previous day (though banks deposited an additional EUR16.7 bln in their current accounts held at the national central banks)”.

“At least one bank has made the announcement that it will no longer deposit surplus cash at the ECB, although it seems likely that many international banks have had a strong incentive to swap into alternative currencies since the deposit rate was pushed down to zero”.

“While it is difficult to drawn firm conclusions as to any changes in banks’ behaviour at this stage, money market rates have pushed lower as a consequence of the ECB action to levels well below last month’s average and the yield on Germany’s 2 year note has hit its lowest level in a year”.

“The reaction in interest rates has led to talk of the EUR potentially being used as a funding currency for carry trades. However, in a region as complex as the Eurozone, the term ‘carry trade’ should be used with caution. Positive ‘carry’ on peripheral bond yields has been fundamental to EUR resilience since late 2012”.

“The ECB’s threat that QE could yet be invoked could therefore lend the EUR support if it increased demand for bonds. The ECB will be aiming to engineer a fall in net demand for the EUR through the changes in monetary policy instruments”.

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