Forex Flash: ECB to contemplate negative rates? – BMO Capital Markets

FXstreet.com (Barcelona) - According to Stephen Gallo at BMO Capital Markets, “Investors are not entirely sure that Mario Draghi’s comment, suggesting that the ECB is ready to cut the deposit rate to negative was an explicit attempt to weaken the EUR.” Going negative on key rates is an enormous decision, especially for the ECB, as such a move attempts to force an unnatural, behavioural shift in money market conditions and the banking system, leaving the risk that the two become even more dysfunctional over time.

So hanging in the balance for the ECB we have on the one side the potential for a weaker EUR (benefit), and on the other we have the potential for a permanently altered Eurosystem (cost). Moreover, suggesting a cut is possible now in order to weaken the EUR is an implicit acknowledgement that you’d be willing to tolerate a back-up in the EUR further out in time as it becomes apparent that the Eurosystem is simply not willing to take such a risk with negative rates, which is essentially a “zero sum game” for the ECB to play.

“We’re also pretty sure that with so many other factors including EMU bond spreads and external capital flows driving the EUR at present, one major risk would be that the overall negative impact on the EUR