"Second, the effect on FX once the zero bound is crossed will likely be non-linear. On the one hand, it will be the first time a major central bank “pays” investors to short the currency. Swiss money market rates briefly turned negative in the crisis but the SNB never charged banks for deposits. Denmark also has negative rates but this is to defend a fixed exchange rate. If the euro becomes the first major funder with NIRP (negative rate policy) rather than ZIRP status, portfolio shifts are likely to be larger than usual.
"Third, negative rates will open up market pricing for QE. The ECB can’t take rates too negative, because at some point the opportunity cost of depositing at the ECB will be high enough to encourage physical cash hoarding and financial disintermediation. Once rates go negative, the next step is for the market to start pricing quantitative easing, and rightly so in our opinion – real rates in Europe remain higher than in the US.
"Third, negative rates will open up market pricing for QE. The ECB can’t take rates too negative, because at some point the opportunity cost of depositing at the ECB will be high enough to encourage physical cash hoarding and financial disintermediation. Once rates go negative, the next step is for the market to start pricing quantitative easing, and rightly so in our opinion – real rates in Europe remain higher than in the US.
