To relieve funding pressures at European banks, the major European
central banks and the BoJ will be conducting dollar liquidity operations
in co-operation with the US Fed. This relieves the immediate pressure
and encourages USD sell-off – but for how long?
The ECB, BoE, and SNB, in co-operation with the Fed, have announced
USD liquidity operations to relieve funding pressures that European
banks were feeling as funding was drying up lately due to the strains
from the sovereign debt situation in Europe and its perceived effects on
banks’ creditworthiness and counterparty risk. EURUSD jumped to
attention and sailed higher on the news, as did GBPUSD, though to a
lesser degree as European banks were in the more intense spotlight.
The liquidity operations are to be for 3-month funding (on top of
existing 7-day funding) and are for as much funding as banks want as
they are for “full allotment”. The central banks stated that the
operations would cover banks through the end of the year. The first
tender date will be 12 October with two more to follow, one on 9
November and the following on 7 December.
This added to the recent consolidation in the greenback as it
relieved a key source of the pressure on the greenback’s appreciation.
But the irony of this situation is that, while it relieves the immediate
pressure on USD funding needs, it also formalizes/publicizes the fact
that European banks are in desperate need of USD’s and will need to pay
them back later if not now.
The move shouldn’t come as any surprise as we’ve become so
accustomed to every pinch in liquidity to be relieved by the worlds’
central banks. It’s extend and pretend, kicking the can, etc., and it’s
reaching such a degree that our Chief Economist has dubbed the latest
all out efforts to plug the ever-leakier dyke “Maximum Intervention”.
SNB
The SNB was out earlier in what amounted to a cage-rattling,
threatening to do its utmost to keep the franc weaker and declaring that
1.20 is still very low. It feels like the market wants to see more
action and less talk, as there was but a flurry of reaction to these
“developments”.
US Data
So much for the hope for mean reversion in the US Empire
manufacturing survey, as the Empire survey dropped yet again to notch
its worst reading since the one-off tumble last November and its fourth
negative reading in a row. The employment and work week sub-indices
dropped into negative territory for the first time in the cycle. The
Philly Fed was also a bit weaker than expected, though not as
catastrophic as the July reading. One can perhaps hope that the
hurricane has something to do with the weak Empire and Philly readings.
The weekly jobless claims number could certainly have been affected,
just as we saw claims data spike in the wake of hurricane Katrina back
in 2005.
Looking ahead
The relief rally from this announcement of liquidity operations
doesn’t necessarily change the game – it could fade already after today
or it might take a couple of weeks, depending on whether additional
measures are announced – perhaps an attempt over the weekend by the EU
to show far more solidarity than we’ve seen thus far, or perhaps on an
enthusiastic response to whatever the maximum intervention Bernanke Fed
has to say on Tuesday regarding QE3. Until then, the weakening economies
and weak data out of the US are not encouraging and this measure is of
the same ilk as all past extend-and-pretend interventions.
Economic Data Highlights
- Switzerland Q2 Industrial Production out at +3.6% QoQ and +2.3% YoY vs. +3.0% +2.7% expected, respectively and vs. +4.5% YoY in Q1
- Switzerland SNB left Libor Target Rate unchanged as expected
- Norway Aug. Trade Balance out at +32B vs. +38.1B in Jul.
- UK Aug. Retail Sales ex Auto Fuel out at -0.1% MoM and -0.1% YoY vs. -0.2%/-0.2% expected, respectively and vs. 0.0% YoY in Jul.
- EuroZone Aug. CPI out at +0.2% MoM and +2.5%YyoY as expected
- Canada Jul. Manufacturing Sales out at +2.7% MoM vs. +1.4% expected and -1.3% in Jun.
- US Aug. Consumer Price Index out at +0.4% MoM and +3.8% YoY vs. +0.2%/+3.6% expected, respectively and vs. +3.6% YoY in Jul.
- US Aug. CPI ex Food and Energy out at +0.2% MoM and +2.0% YoY vs. +0.2%/+1.9% expected, respectively and vs. +1.8% YoY in Jul.
- US Q2 Current Account Balance out at -$118B vs. -$122.4B expected and vs. -$119.6B in Q1
- US Weekly Initial Jobless Claims out at 428k vs. 411k expected and 417k last week
- US Weekly Continuing Claims out at 3726k vs. 3710k expected and vs. 3738k last week
- US Aug. Industrial Production out at +0.2% MoM vs. 0.0% expected and +0.9% in Jul.
- US Aug. Capacity Utilization out at 77.4% vs. 77.5% expected and 77.3% in Jul.
- US Weekly Bloomberg Consumer Comfort Index out at -49.3 vs. -49.0 expected and -49.3 las week
- US Aug. Philadelphia Fed out at -17.5 vs. -15 expected and -30.7 in Jul.
Upcoming Economic Calendar Highlights (all times GMT)
- US Fed’s Tarullo to Speak (1745)
- New Zealand Sep. ANZ Consumer Confidence (0100)
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