The focus of the market at the start of the week is on ECB Draghi’s recent comments with regarding to the Euro rate. In this regard, Bank of Tokyo-Mitsubishi UFJ (BTMU) thinks that as it had become evident from the last press conference, the ECB is clearly zoning in on the euro as a primary source of concern in achieving its price stability mandate. “Still, EUR/USD is only 1.7% higher than what has been assumed in the ECB staff projections released last month and hence the message from Draghi is that further euro gains would require action. This was already the message at the April press conference and hence is not new additional information for the markets,” BTMU notes. “Perhaps the ECB is concerned over an escalation of the Ukraine crisis – might that result in substantial capital flight to the euro. That is certainly plausible. Close to USD 70bn of capital has already left Russia and given the US’ freer hand in implementing tough sanctions, it makes sense for Russians to park funds in the euro rather than the dollar,” BTMU argues. “Draghi’s comments do reinforce our view though that action will be taken, probably at the June meeting, with a negative deposit rate the step taken,” BTMU projects.
