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May 28th, 2013 at 4:27 pm

The Euro would Tank with a Negative Deposit Rate

Guest post by Marcus Holland from

The Euro moved lower against most major currencies on Tuesday on the back of dollar strength cause by the perception of dovish comments from the ECB. The weakness came despite strength in the European equity markets as many believe the a negative deposit rate could be in the cards for the ECB. The EC is scheduled to meet this week to discuss the EU budget, which could generate volatility and put the EU back in the headlines.

The EUR/USD currency pair sliced through the 10-day moving average and is poised to test support levels near the Bollinger band low (the bottom of the 2-standard deviations range around a 20-day moving average). Resistance is now seen near the 10-day moving average near 1.2890, and then the recent highs near 1.30 (chart courtesy of Forex Bonus).

Momentum on the currency pair seems to be declining as the market consolidates between the Bollinger bands high and low. The MACD is printing near the zero index level as the spread (the 12-day moving average minus the 26-day moving average) approaches the 9-day moving average of the spread.

During the week the EC will have is annual compliance review of the budget. During this review there are a number of topics that will be discussed including the excessive deficit in Italy. Italy similar to other EU countries is facing the daunting task of combining growth and austerity which seems to be harder than expected.

In discussing Spain and the Netherlands the EC will probably look to provide an extension to Spain, and the Netherlands in reaching the deficit targets.

In an effort to jump start investment into the country, Spain’s government approved a bill on Friday to grant residency permits to foreigners who buy high-end homes or start new businesses. According to reports the plan would grant residency to individuals who spend 500K Euro on real estate or 2 million Euro in Spanish debt.

With regard to the ECB, there continues to be chatter than the central bank is considering a negative deposit rate in an effort to spur lending and increase wealth. The latter is likely as investors look to alternative investment to avoid paying a fee for holding funds in a bank. Increasing lending to small business seems to be different issue, as it is hard to see how a negative deposit rate would incent banks to lend to small businesses.

Interest rate differentials continue to point to a lower Euro against the US dollar. The 10-year yield differential between the German Bund and the US 10-year note is trading near minus 60 basis points in favor of the US. This makes it more difficult to hold on to the Euro and pay away interest to short the US dollar. Eventually this negative force could pull the EUR/USD below support levels, generating additional interest in the dollar.

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