Forex Flash: Even a ECB refi rate cut may be EUR-positive – TD Securities

FXstreet.com (Barcelona) - In regard to policy tools the ECB could use, TD Securities analysts said that new LTROs would generally be positive for EUR/USD and German rates “as there is enough excess liquidity in the system that market pricing for normalized money market rates is already pushed back to 2015”. “There is simply limited scope for new liquidity to alter this pricing significantly as it would likely be drained before then. Even a refi rate cut, as long as it comes with no strong language on the potential for a deposit rate cut, would likely eventually be EUR+ as the improvement in sentiment and funding would outweigh the muted moves in STIR”, wrote analyst Richard Kelly, explaining how much the political worries over Cyprus and Italy, the prospects for ECB easing and path for euro are tied to the data. “Since August, the correlation between 1m changes in EUR/USD and the spread in EZ/US data surprises has been 0.74. Euro’s declines in February did seem to be kicked off by the ECB citing the currency as a downside risk, but ultimately, verbal intervention only works when it is supported by the facts. Since that point, US data surprised strongly to the upside while Eurozone surprises trended towards disappointment, and EUR/USD went along for the ride. The USD remains bid but still needs the fundamentals, so if these surprises mean-revert, as they are wont to do, it implies European markets will need more justification to price in further downside in the near-term”, he concluded.