ECB won by targeting Foreign Reserves – SG

FXStreet (Guatemala) - Sebastien Galy, analyst at Societe Generale explained that the EUR/USD is now most likely a sell on rallies.

Key Quotes:

“…as foreign reserves reallocate into the higher yielding UST curve helping to cap the back end and likely investing in some key EM curves”.

“This confirms that the ECB won the game on EUR/USD by changing the dynamic of reserve diversification into EUR which had kept EUR very expensive and deflationary pressures considerable”.

“Reserve selling should pressure EUR/USD lower the prospect of a Greek election increases credit risk in the Eurozone”.

“It also increases the odds of ECB easing as does ever lower oil prices. Faced with these twin hammers on EUR reserves, the amount of EUR selling may remain considerable helping the downward EUR/USD trend”.

“Compensating this partly are hopefully rising export revenues as the EUR weaken. The Japanese experience suggests considerable patience on this mechanism”.