EUR losing its reserve status; ECB likely to extend easing

IMF COFER data released last week shows a further drop in official foreign reserves allocated in euro in Q4 2014. Since the euro crisis, the currency has been losing some of its reserve status and reserve managers have been looking to diversify their foreign reserves out of the euro.

"This trend is likely to continue due to ongoing political risk and aggressive ECB easing, making the currency unattractive", says Societe Generale in a report on Tuesday.

The eurozone is enjoying the tailwinds from cheap oil, a weak euro, improving financial conditions, and looser fiscal policy. But, given the still-significant need for deleveraging and reform, these short-term tailwinds may not result in a self-sustained recovery.

Consequently, economists expect ECB asset purchases to continue beyond September 2016 if the inflation outlook does not improve. They expect the ECB to also add corporate bonds to its asset purchases in 2016 (to support the supply of assets), and extend QE and the TLTRO programme by around one year to mid-2017 (adding an additional €600bn to its balance sheet).