The ECB Announces The Last Of Its Blow Out Money Sales
We’re not entirely sure what happened to the “on deposit” stories that were doing the financial news-rounds in late 2011, remember how it was?
The ECB would offer three year virtually unlimited loans to banks at a 1% coupon, they termed it LTRO, (long term refinancing operation). The banks would then immediately deposit the same borrowings with the ECB as they distrusted their counter parties that much they couldn’t possibly lend it to them by doing you know, normal clever ‘banking stuff’.
Therefore the perfect symmetry and social uselessness of the desperate insolvent banks, who scrambled over each others’ rotting zombie like corpses for the loans, was contained in a perfect if not surreal loop; central bank lends at 1%, bank gives it back on deposit to earn (at best) 0.5% interest, that’s banking for you, in the ‘new paradigm’ 2011-2012 style.
The ECB has announced that the window is closing, the next auction (the second) will be the last and if the total lent is the rumoured one trillion euros then the ECB’s plan may work. Supply may exceed demand, they may not be able to give the money away suggesting that the system is healed. That’s if by healed we judge that the banks will be that awash with liquidity therefore solvency should not be an issue…at least for a year or two..
The ECB wants to keep pressure on governments to improve their defence of the euro zone with better economic policies and by bolstering their European Stability Mechanism (ESM) firewall which will come into being by mid-year. Making hundreds of billions of euros easily available to banks over a three-year period risks fuelling a credit binge that some central bankers worry could increase inflation whilst fostering a central bank dependency culture. Some at the ECB believe banks should now be redoubling their efforts to raise fresh capital, as UniCredit recently did through its rights issue, and fear the ECB’s help will create zombie banks reliant on central bank support;
If you are flooding the market with cheap refinancing then there comes a point when you are preventing the market from working, because nobody is going to borrow from another bank at X percent if they can borrow from the ECB at Y percent.
The ECB channelled nearly half a trillion euros in cash at the first operation on December 21. A Reuters poll of over 60 economists showed a mid-range expectation for it to allot another 492 billion euros next week, some analysts expect a trillion to be taken.
If banks used the first LTRO to plug their funding needs and fend off a credit crunch, ECB officials hope they could use the second more aggressively to buy higher-yielding bonds, especially from Italy which needs to recycle circa €105 bn of bonds before the end of April.
While ECB officials expect the second LTRO to give a boost to lending as well as bond-buying, they are nonetheless worried about banks becoming dependent on the ECB or heightened liquidity provision leading to irresponsible banking decisions.
Market Overview
U.S. equities shed their earlier session gains, a surge in oil dragged down transportation and consumer shares while Greece’s approval for a second bailout failed to spur enough confidence to keep the Standard & Poor’s 500 Index at an almost four-year high.
The S&P 500 rose 0.1 percent to 1,362.21 at 4 p.m. in New York after earlier climbing as much as 0.5 percent to top its highest closing level since June 2008. The Dow Jones Industrial Average shrank its earlier advance after climbing above 13,000 for the first time since May 2008. The Stoxx Europe 600 Index lost 0.5 percent. The 10-year U.S. Treasury yield jumped six basis points to 2.06 percent. WTI Oil reached a nine-month high near $106 a barrel as Iran said it stopped selling to France and Britain.
Commodity Basics
Iran stopped selling oil to France and Britain on Monday, preempting a European Union ban. EU nations bought a combined 18 percent of Iran’s exports of crude and condensates, or 452,000 barrels a day, in the first half of 2011, according to the U.S. Energy Department. France purchased 49,000 barrels a day and the U.K. 11,000 barrels.
Brent oil for April settlement increased $1.63, or 1.4 percent, to $121.68 a barrel on the London-based ICE Futures Europe exchange.
Forex Spot-Lite
The Dollar Index, which tracks the U.S. currency against those of six trading partners, fell 0.3 percent. The Australian dollar weakened against all 16 of its major counterparts, losing 0.8 percent versus the U.S. currency, after minutes of the nation’s most-recent central bank policy meeting showed there is scope for monetary easing.
The yen fell 0.1 percent to 79.74 at 5 p.m. in New York, after touching 79.89 yesterday, the weakest since Aug. 4. The euro declined less than 0.1 percent to $1.3234 after reaching $1.3293, the highest level since Feb. 9. Europe’s currency rose 0.1 percent 105.54 yen after earlier rising to 106.01 yen, the most since Nov. 14.
Source: FX Central Clearing Ltd, (FXCC BLOG)
http://blog.fxcc.com/february-22-am-2012/
Forex Trading Article by FXCC: Fundamentalism For The Forex Trader
Fundamental analysis of a business involves analysing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and management.
When analysing a stock, futures contract, or currency using fundamental analysis there are two basic approaches one can use; bottom up analysis and top down analysis. The term is used to distinguish such analysis from other types of investment analysis, such as quantitative analysis and technical analysis. Fundamental analysis is performed on historical and present data with the goal of making financial forecasts.
Eurozone, The Fundamental Lessons
We’ve experienced a significant unforeseen and unintended consequence as a result of the prolonged Eurozone issues and hopefully many FX traders will have immediately picked up on it. For many traders, who were not previously plugged into the news and aware of how macro economic news affects the markets, then the past year has provided a constant stream of superb unmissable examples as to who, how and why the markets move..
Over the past twenty four hours we’ve witnessed a superb illustration of the euro moving in perfect synergy with the prevarication and apparent indecision of the Euro group and troika. The shadowing of price, as the news ebbed and flowed, was almost balletic. As opinions varied in the media as to the eventual result of the troika/Euro group (and the clock ticked down) there was a visible reaction to all currency pairs containing the Euro as the counter party. That reaction reached a fascinating ‘crescendo’ yesterday evening and early this morning.
The euro fell versus the dollar in the NY Monday afternoon session as optimism evaporated that a deal would be reached. That fall was magnified at 11 pm GMT as the planned meeting failed to take place. The euro then experienced a sharp spike up from 2:40 to 3:15 am GMT as news broke that a deal had been finally reached. As the morning session began (and analysts got to work) sobriety overtook optimism, the euro fell as many investors deduced that this agreement is only the first step to recovery. Since which time the currency has recovered to be printing at a price of 13270 up circa 60 pips or 0.47% on the day. The pair is near on parity with yesterday’s high and only 23 pips short of the daily high.
However, if we move away from shorter term charting, to look at perhaps the two hour chart over the past week, we can gather a far superior viewpoint of the fundamentals that have been in play. On the 13th of Feb. the euro began to experience a significant fall of over 200 pips to dip below 13000, from which it recovered as of midday on the 16th of Feb. to reach 13276 midday yesterday. Both of these ‘swings’ over the past week can be directly related back to the overall events concerning the Eurozone issues as they unfolded last week.
13th Feb – 15th Feb
Athens had been left scarred by the social unrest around the Greek parliament on Sunday 12th. Cutting minimum wages, slashing public spending and sweeping lay offs in the public sector fuelled the anger. Eurozone finance ministers closely monitored the situation in Greece before making further decisions on the bailout package due to be presented at Wednesday’s meeting. They’d rejected a previous set of measures proposed by Athens, and were demanding an extra 325m euros in savings. The Eurozone ministers subsequently cancelled the meeting scheduled for Wednesday 15th the Greek finance minister stating that the troika was shifting terms of €130bn bailout deal as part of move to force country out of eurozone.
16th Feb – 20th Feb
On the 16th it was announced that the extra budget cuts had been found. Hopes rose that the European Union would agree a fresh €130bn bailout on Monday (yesterday) to save Greece from defaulting on its debts after politicians in Athens said they were close to a deal with their single currency partners.
Amid attempts by Brussels to defuse the tension that has been building between Greece and Germany it appeared that the austerity stricken southern European country had found the additional budget cuts being demanded by the rest of the eurozone. “We are almost there,” one source said. The news came after European markets were closed but the Dow Jones index rallied by 123 points to close at a four year high encouraging risk on were the euro was concerned. This optimism, for the eventual rescue rubber stamped in the early hours of this morning and as previously highlighted frayed nerves were evident on our charts as the news leaked out of Brussels and the deal was eventually agreed.
Whilst not the purest of fundamental analysis examples this brief snap shot of a single currency pairs behaviour, in relation to the most critical of fundamental decisions in recent times, perfectly illustrates the overwhelming power and superiority of FA above TA. Price did not ‘bounce off’ moving averages, the market didn’t concentrate on stop hunting around resistance and or support, it didn’t revert to the mean due to touching the upper or lower Bollinger band..price was dictated and shaped by the critical fundamentals in play at the most crucial economic time the seventeen nation Eurozone has witnessed since it’s creation. That ‘information’ in the form of intelligence was then translated onto our charts.
This article isn’t intended to decry the use of TA, (technical analysis) after all as the author of this and many articles for FXCC many readers will know that I’m as hard core a technical analyst and trader as you’ll find, ALL of my decisions are taken off the charts based on the alerts/set ups I’ve embedded in my charts, however, the crucial issue is that I understand why price moves, who is making it move and hopefully when that move and trend will end.
This article is in two parts. Part two will cover the very basics of Fundamental Analysis.
Source: FX Central Clearing Ltd, (FXCC BLOG)
http://blog.fxcc.com/fundamentalism-for-the-forex-trader/
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