Investors have put on fresh EUR-shorts expecting more ECB action ahead of the June meeting, notes Citi.
“Discussions with clients so far in Asia seem to suggest that investors are positioning for a main refi cut and suspension of the SMP sterilization as well as negative deposit rates,” Citi adds.
Refi or depo cut in June:
“We think that the former measures (refi cut) could indeed come on June 6 given President Draghi’s recent comments. We doubt, however, that the Governing Council would be moved to lower deposit rates below zero just yet,” Citi projects.
“Negative deposit rates would help cheapen the euro because it would lower its rate advantage across the board. The experience of the Danish Central Bank would suggest that negative deposit rates could be a powerful trigger of FX depreciation. The above being said, negative deposit rates remain controversial in our view. The introduction of the measure led to negative money market rates and drying up of the money markets in Denmark,” Citi adds.
The trade:
“We suspect that EUR downside need not be as pronounced if the ECB does not ‘deliver’ negative deposit rates. We maintain our view that the ‘safer’ bet on the downside would be short EURGBP. The cross could be heading lower once again once positioning has moved back closer to neutral,” Citi advises.