-Societe Generale
The single currency declined for the third straight session on Wednesday, with the EUR/USD pair falling 0.15% and moving closer to its four-month low seen last week after the ECB meeting. The decision to implement negative interest rates will lead to an arbitrage of cross-currency rate differentials and inflows of capital. In contrast, expectations for higher inflation and stronger growth in the United States mean that rates and the buck itself will move higher over the rest of the year.
On Tuesday several ECB's officials backed more stimulus and pushed the Euro lower. A day later, another member, Yves Mersch pointed out that the implementation of the U.S.-style quantitative easing will be straightforward. He sees the process of buying asset-backed securities as a major boost for inflation, however, he also warned that a lack of coordination and supervision will hold back the economic acceleration. It is not a surprise, Mersch is highly unsatisfied with the current state of the ABS market, and he thinks the QE will imply substantial changes to it.
After a short-lived appreciation a couple of hours after the ECB meeting, the single currency is likely to post a long-term downside rally. A re-test of the 1.35-mark is only a matter of time.
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