9 Mar 2015
Currency war grows and ECB QE's deflationary risk - BAML
FXStreet (Guatemala) - Analysts at Bank of america Merrill Lynch explained that they think that the start of ECB QE increases global deflation risk and they believe that the market is underpricing this risk.
Key Quotes:
" Currency volatility appears to be playing a disproportionate role in driving relative equity returns so far this year. The fact that long-term rates across the same countries are struggling to diverge suggests exchange rates may be becoming the most important transmission channel for monetary easing.
"The positive correlation between US equities and the USD that reached a 15-year high only three months ago has started to collapse. This likely signals that investors are starting to worry that a strengthening USD could increase US recoupling risk."
"Markets have gone a long way to price in ECB QE, but the start of the ECB's actual bond purchases is likely to generate EUR negative flows. In our view, a high share of bonds that the ECB will be buying will come from holdings by foreign investors. We think this could lead to as much as 10bn worth ofEUR selling against other currencies every month."
"The decline of EUR/USD below 1.10 may be less benign than it may appear at first. We believe it is likely to exacerbate an exit from EM, increase the risk of an RMB devaluation, place renewed downward pressure on oil prices, and heighten concerns about deflation risks."
Key Quotes:
" Currency volatility appears to be playing a disproportionate role in driving relative equity returns so far this year. The fact that long-term rates across the same countries are struggling to diverge suggests exchange rates may be becoming the most important transmission channel for monetary easing.
"The positive correlation between US equities and the USD that reached a 15-year high only three months ago has started to collapse. This likely signals that investors are starting to worry that a strengthening USD could increase US recoupling risk."
"Markets have gone a long way to price in ECB QE, but the start of the ECB's actual bond purchases is likely to generate EUR negative flows. In our view, a high share of bonds that the ECB will be buying will come from holdings by foreign investors. We think this could lead to as much as 10bn worth ofEUR selling against other currencies every month."
"The decline of EUR/USD below 1.10 may be less benign than it may appear at first. We believe it is likely to exacerbate an exit from EM, increase the risk of an RMB devaluation, place renewed downward pressure on oil prices, and heighten concerns about deflation risks."