Eonia: Levels, Ranges, Targets

Eonia trades between negative 0.3 to negative 0.2. In actuality, Eonia trades at positive 0.8 to 0.7, a 10 basis point range. The range is mandated by ECB policy and only a change at a particular meeting would reorder the range. The 10 year range from monthly averages 1- 10 is located from 10 year highs at 1.26 to 1 year at 0.87 or negative 0.12.
Current Eonia trades comfortably below all averages but because Draghi cut three times to negative since 2014, averages failed to maintain pace against current prices. As a result, averages are severely oversold from 1 – 5 years but most particularly oversold at the 1 and 3 year averages. The 10 year average reveals not only a solid down trend just underway but it confirms the current oversold condition as well as the confirmation of the 10 basis point range holding because the target is found at minus 0.26 or 0.73. Time is needed and a rest at current prices to bring the averages lower as Eonia in monthly average terms moves a few basis points per month.

The closest average to current prices is the 1 year at minus 0.12 or 0.879 and its the most oversold. The target on that average is 0.83. The 0.83 target doesn’t mean the target achieves its intended destination. What targets mean is Eonia is heading for the top of the negative 0.3 or 0.8 range. The 2, 3, and 5 year average targets are found at 84, 89 and 86 or minus 0.15, minus 0.10 and minus 0.13. Targets as well reveal the 10 basis point range.

What oversold Eonia means for Draghi is probably on hold and no further movement of Eonia for the March meeting. To move again so soon places the averages in severe flux and challenges a EUR/USD price that may skyrocket. At this experimental stage of negative Eonia and three cuts later, a higher EUR/USD would not be in the interest of Draghi overall plan.

Brian Twomey

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