5 Feb 2014
Flash: EUR/USD unaffected by massive ECB balance sheet shrinkage - Societe Generale
FXStreet (Barcelona) - Sebastien Galy, Senior FX Strategist at Societe Generale believes that to understand the difference between the storyline of taper and economic reality one can look at the experience of the ECB.
Key Quotes
“The ECB ran its own stealth version of QE offering long term financing to banks. Those in the periphery used it to run a large scale carry trade on their sovereign curves. Since then, the ECB balance sheet has seen massive shrinkage without much of an impact on sovereign curves or for that matter EUR/USD.”
“Peripheral banks have presumable deeply reduced their positioning ahead of the year end capture time for the ECB AQR. One possible reason is that foreign capital rushed back to the periphery filling in any financing gap.”
“Such arguments based on portfolio positioning are always appealing as it is the business of day to day. Backtesting portfolio positioning models gives fairly appalling results as positioning follows price. Arguments based on relative money work better to explain currencies but are far inferior to models based on rate differentials.”
Key Quotes
“The ECB ran its own stealth version of QE offering long term financing to banks. Those in the periphery used it to run a large scale carry trade on their sovereign curves. Since then, the ECB balance sheet has seen massive shrinkage without much of an impact on sovereign curves or for that matter EUR/USD.”
“Peripheral banks have presumable deeply reduced their positioning ahead of the year end capture time for the ECB AQR. One possible reason is that foreign capital rushed back to the periphery filling in any financing gap.”
“Such arguments based on portfolio positioning are always appealing as it is the business of day to day. Backtesting portfolio positioning models gives fairly appalling results as positioning follows price. Arguments based on relative money work better to explain currencies but are far inferior to models based on rate differentials.”