Danske Research flags a scope for EUR/USD downside if the exemption of bank reserves from the supplementary leverage ratio expires in the US on March 31.
"The supplementary leverage ratio (SLR) require US banks to hold capital against their stock of bank reserves. Regulators temporarily exempted bank reserves from the SLR calculation last year, which allowed banks to accumulate the rise in reserves on the back of Federal Reserves balance sheet expansion. The exemption is set to expire 31 March unless regulators extend it further or even make it permanent," Danske notes.
"We think it is most likely regulators extend the exemption. Otherwise, Fed risks making monetary policy impotent, but the fact that a decision is still pending means there must be a chance they will not. In our view, markets are not pricing such outcome and it would lead to (1) a drop in US inflation expectations and rise in real rates, (2) drop in EUR/USD FX spot, (3) a wider EURUSD OIS basis on tighter USD funding conditions and (4) tighter US asset swap spreads," Danske adds.