20 Jun 2014
EZ monetary specifics - BAML
FXStreet (Guatemala) - Analysts at Bank of America Merrill Lynch went into European monetary specifics.
Key Quotes:
"In early July 2012, the ECB cut the deposit rate to zero. The July maintenance period saw EONIA average around depo rate +11bp (similar to where we fixed yesterday), and by the end of the year, fixings had drifted lower to reach depo+6bp."
"Also in July 2012, German and French bills turned negative, with yields on 3M Bubills trading as low as -20bp (see Chart of the day). As they have now re-entered negative territory, we are left to wonder if we could see a replay of the 2012 dynamics."
"While current excess is lower than in 2H12 by over €600bn, we see potential for Eonia to continue to fix at around current levels (1-5bp) for the next couple of months, benefiting also from a much tighter corridor than in 2012. Spikes over quarter-end are possible but, with Eonia theoretically capped at the marginal lending rate of 40bp, we think we are unlikely to see a repeat of the 69bp fixing in late March."
"Back in 2012, VLTRO repayments were not permitted, but they are now one source of uncertainty now faced by the market on a weekly basis. Also, the direction of autonomous factors may have been more predictable."
"This is no longer the case as the negative deposit rate affects overnight government deposits held at national central banks and some deposits by foreign central banks and other institutions. The negative deposit rate could, therefore, result in a structural decrease in autonomous factors (and, hence, an increase in excess liquidity) as governments begin/extend money-market operations while other institutions look for alternatives to park their cash (discussed in detail here)."
"Italy, for example, could see as much as €75bn of government deposits affected (see full report for footnote). Overall, should autonomous factors indeed decrease and repayments continue below market expectations, excess liquidity could remain around current levels, preventing a sharp rise in Eonia over the coming months."
Key Quotes:
"In early July 2012, the ECB cut the deposit rate to zero. The July maintenance period saw EONIA average around depo rate +11bp (similar to where we fixed yesterday), and by the end of the year, fixings had drifted lower to reach depo+6bp."
"Also in July 2012, German and French bills turned negative, with yields on 3M Bubills trading as low as -20bp (see Chart of the day). As they have now re-entered negative territory, we are left to wonder if we could see a replay of the 2012 dynamics."
"While current excess is lower than in 2H12 by over €600bn, we see potential for Eonia to continue to fix at around current levels (1-5bp) for the next couple of months, benefiting also from a much tighter corridor than in 2012. Spikes over quarter-end are possible but, with Eonia theoretically capped at the marginal lending rate of 40bp, we think we are unlikely to see a repeat of the 69bp fixing in late March."
"Back in 2012, VLTRO repayments were not permitted, but they are now one source of uncertainty now faced by the market on a weekly basis. Also, the direction of autonomous factors may have been more predictable."
"This is no longer the case as the negative deposit rate affects overnight government deposits held at national central banks and some deposits by foreign central banks and other institutions. The negative deposit rate could, therefore, result in a structural decrease in autonomous factors (and, hence, an increase in excess liquidity) as governments begin/extend money-market operations while other institutions look for alternatives to park their cash (discussed in detail here)."
"Italy, for example, could see as much as €75bn of government deposits affected (see full report for footnote). Overall, should autonomous factors indeed decrease and repayments continue below market expectations, excess liquidity could remain around current levels, preventing a sharp rise in Eonia over the coming months."