We know they’ve been discussing negative deposit rates but the market has largely blown this off as just talk (hear it often enough and it gets tuned out). The fact that we’re now hearing actual numbers has caught the markets attention and quite rightly put the skids under the euro rally.
The problem will come if they do cut the rate and banks have to go looking elsewhere to park their cash. It’s not going to be lent into the economy as 1. It hasn’t so far and 2. There’s an overlooked issue that the economy may not want to borrow it.
So where will it go then? Into riskier assets with higher returns? How about some sub prime? We’ve been there before
Trading wise we could start to see higher yielding currencies start to benefit from these headlines. Currencies like NZD and AUD are prime candidates so keep an eye out for any decent dips.
The other side of the coin is that the Swiss may be forced into action to protect the peg from any strong euro weakness, again look for decent dips to play against the peg.
It’s just unsubstantiated headlines at the moment but I feel that in this case there’s no smoke without fire. We could see a sentiment switch to the downside now so stay nimble with your views and look for signs that the upside is starting to hold greater resistance.
