Yesterday’s decision by the major central banks to expand dollar liquidity provision operations has yet another eerie parallel with 2008, on the 3rd anniversary of Lehman’s downfall. On the 18th September 2008 central banks announced a coordinated expansion of dollar liquidity to ease similar funding pressures in the wholesale market. This was ramped up in the following month and was the last co-ordinated action on liquidity we have seen from central banks. Since then, most central banks have been absorbed with their own specific liquidity issues, as well as separate measures to give their economies a kick start (invariably quantitative easing). Given the greater recourse to the ECB’s dollar funding facility recently, together with the fact that market rates had moved through the price of ECB dollar funding (at 1.10%), this move does not come as a great surprise.
Nevertheless, it is significant that central banks are prepared to act together, suggesting that they now share a more common purpose, rather than being engrossed in their own circumstances. The euro’s initial response was positive, as was the reaction of battered bank shares. Traders are conscious that being short euros ahead of today’s Ecofin meeting might not be a good idea, as it is just possible something more substantive may result, especially if America’s Tiny Tim convinces Europe’s elite to implement his TARP template. That said, this action on dollar funding will be more effective in putting a cap on funding costs rather than bringing them down from the currently elevated levels. The premium for borrowing in dollars via euros has fallen to around 80bp, which takes it back to levels last seen five weeks ago. In other words, the major central banks have merely treated the symptom, rather than the cause. Should the Ecofin meeting produce yet more dithering, it is likely that euro-selling will resume next week.
Guest post by FxPro
Commentary
Ice-cold comfort for the euro. Those warm words of conviction from Angela Merkel and Nicolas Sarkozy the previous evening temporarily placated some of the euro bears yesterday and partially soothed the now fractured nerves of investors worried that a Greek default was only days away. There was also some encouragement from the head of the EU’s task force, Horst Reichenbach, who is in Athens to supervise/help Greece with its privatisation and the modernisation of its bureaucracy. Spain’s relatively successful bond auction helped the mood, as did news that coalition talks in Belgium are, finally, making some progress. In the afternoon, the announcement that the major central banks were expanding dollar liquidity operations gave the single currency an additional boost, with a high of 1.3937, well clear of the 1.35 level witnessed earlier in the week. European equities were also higher for the third consecutive day, the DAX up more than 3%. Unfortunately, verbal reassurances from European leaders these days are much like counterfeit notes – of little real value. Europe’s sovereign debt and banking crisis worsens by the day and its leaders are still unable to come up with a coherent plan to stabilise the situation.
The Swiss franc’s tightrope. On the third consecutive day of dollar losses, the Swissie was one of the main beneficiaries, along with its newish partner in crime, the euro. The Merkel/Sarkozy show provided some comfort, as did the announcement from the major central banks that they were swooping to the rescue with plenty more dollar liquidity. The SNB’s policy meeting yesterday essentially reinforced last week’s commitment to undertake further measures “if needed”, with the Swiss economy expected to stall in the second half of this year. At the same time, UBS yesterday announced a CHF 2bln trading loss, which initially pushed the Swissie higher, but this was only a fleeting move. Thus far, of interest is that the market has not chosen to put the SNB’s resolve to the test in relation to defending the 1.20 level on EUR/CHF. No doubt, with a lot of pain inflicted on the other side of the SNB’s one-day CHF 17.5bln gain, no-one’s willing to take the step. Still, it’s notable that the Swissie has not strayed far in the other direction, EUR/CHF remaining below the 1.22 level since the announcement.
Relentless British misery. It no longer appears to be having much impact on the currency, but the daily drip-feed of news confirms the continued financial misery being endured by the British economy. Employment in both the public and private sectors is reversing rapidly – a survey by a major UK recruitment firm revealed that City jobs collapsed by 26% in the year ended August, whilst the Institute for Government stated that job cuts in some Whitehall departments were occurring “at a pace and depth that is without precedent”. Consumers remain in their collective bunker, buffeted by job losses and falling real incomes, as confirmed by yesterday’s August retail sales figures. Inflation is still high with no relief in sight, transport fares in London are set to climb by another 7% next year, while consumers’ inflationary expectations rose to a three-year high last month of 4.2%. Private sector demand in the UK is still in retreat, closely followed by the public sector. Not a healthy diagnosis for any currency. Luckily, the situation in other advanced economies is generally very similar, if not identical. Former MPC hawk Weale has changed his tune – he claimed yesterday that the outlook for the UK economy had certainly worsened since the middle of the year and that extra QE was increasingly plausible.
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