Forex Market Updates & Commentary

Effects of ECB Loan Program. Why it is a good thing.
US Existing Home Sales MoM Data Proves Positive
Moody’s maintains Australia’s AAA Rating. Outlook stable.
EURUSD at support area (1.3017-1.3040)
Canada Retail Sales Data Moves to 1.0% vs Survey of 0.5% and Prior of 1.0%
Volatile/Illiquid markets dominate as ECB extends loans to member banks
Canada Retail Sales Data Due at 8:30AM
The NY Forex Review and Preview
OECD says the UK experienced the largest rise in labour costs- caused higher inflation.
French gov’t says they “have no information” of a possible rating downgrade.
Greek credit growth (Oct) -1.2% vs. -0.9% prior reading.
ECB awards 489 bln EUR in 3 year financing loans vs. 293 bln expected.
AUD/USD testing 100 day moving average
BOE MPC voted unanimously to keep rates/bond purchases unchanged in December.
Italian prelim GDP (q/q) -0.2% vs. 0.0% forecast and 0.3% prior reading.

Effects of ECB Loan Program. Why it is a good thing.

Posted: 21 Dec 2011 07:26 AM PST

The ECB loan program whereby they will extend credit out to 3 years at the average of the ECB’s benchmark rate (currently at 1%) was subscribed to the tune of $645 billion today. This was much larger than expected but I am not surprised. With the ECB likely to keep rates low for an “extended period of time” (the Feds chosen words, not the ECB’s at least publically) now, the money represents virtually fixed liquidity at a low 1% yield or less if the ECB cuts more. Banks decided to take the money and run.

So where can they run to? That depends on who you are and how you are preceived by your fellow banks. If you are considered at risk, taking the money solves a liquidity problem. If you are not considered a risk, the money helps recapitalize your bank. There are other benefits to the “at risk” economies like Spain and Italy, if the cards play out properly.

Below are how I see each shaping up.

Banks with Liquidity Concerns: Banks who have liquidity issues will be able to use the funds and not have to worry about securing funds in the interbank market. This will prevent a run on the bank should there be a worry about funding by depositors. It also takes them away from the capital markets where they would likely have to pay a higher rate than 1% for 3 years. It buys these banks time to get their house back in order. Moreover, counterparties who are reluctant to lend now to the troubled institutions- even on a shorter term basis – might be inclined to open up some lending lines to them. This is good and a sigh of relief for those institutions.

Banks without Liquidity Concerns: Banks who do not have liquidity issues can take the cheap funds and apply it in the market. For example, they could venture in shorter term debt market of Spanish and Italian notes – say 2 years. Italy has a Long Term credit rating of A2 from Moody’s and Spain has a rating of A1. It is not AAA but it still is acceptable.

The 2 year yield on Italian bonds are at 5.223% while the 2 year yield on Spanish bonds are at 3.62% (see chart below). An average of the two countries comes to 4.4215%. Banks could purchase these notes with the 1% funds and earn carry profits of 342 basis points. Not a bad return.

Is this not similar to what the US banks did when the Fed embarked on their QE program (by the way QE2 was for $600 billion – very similar to the 645 billion today)? You bet.

When the Fed’s QE program was enacted, banks got the wink from the Fed that rates were to stay low for an extended time period, took the free money, invested in Treasuries, forced the yields down, earned risk free carry profits which boosted capital. They paid off their loans from the Fed and are now in a better financial situation because of it. They could do this because the economy was deleveraging with little risk of inflation sticking.

This is what the ECB may be looking to replicate as they force austerity measures (deleveraging) which will slow growth in 2012. The difference is the ECB can not embark on QE. They are looking instead for the banks to do the QE for them by giving them money, a wink that rates will remain low (and may even decline further) and in effect giving them the AOK to buy Spain and Italy debt. Greece is a separate case but manageble.

Is that play risk free? No. MF Global found that out the hard way with their bet on Italian bonds. However, the story has changed since that time of their demise, with the support from the ECB, the lowering of rates and the likely scenario that rates will stay low for an extended period of time. It is too early to tell, but MF Global may have been a month away from hitting a home run on their risky bond position. The fact is, however, they were overextended at the wrong time, did not understand or define their risk and when the run was on, they compounded their problems. They also were the loan wolf on their bet. Others were concerned about the risk and getting rid of risky assets whether right or wrong. They went at it alone. It is never good to tell “the market” what to do. The market may not agree with your assessment. It is always better to follow “the market”. If the banks take the money and continue to invest in debt of the likes of Italy and Spain, it should turn the tide and take out even more of the risk premium. Sentiment moves the market, and the sentiment may be changing.

So what are the financial gains? The down and dirty of taking $645 and earning a carry spread of 342 basis points in a relatively risk free 2 year debt, yields a return of $22 billion for year one, 44 billion for two years and 66 bilion for three years. It also should lower the cost of borrowing for the likes of Spain and Italy which will allow them to rollover massive amounts of debt in 2012. Looking at the chart below, the borrowing cost in the 2 year sector is already down over 200 basis points. PHEW!!!!

Banks are better off today. The likes of Spain and Italy (which are the main worries in the market) are better off today. Moreover, if they need to do more down the road, the ECB can simply do another tranche.

The risk is the liquidity will re-ignite growth and with it inflation. This is not likely with the pressure put on austerity and the deleveraging that will likely continue to take place. If the economies do not deleverage, that will be a problem, but most think the opposite will occur.

This is a good thing and likely the only thing that could have been done. The firepower has been enacted and the process is started.

US Existing Home Sales MoM Data Proves Positive

Posted: 21 Dec 2011 07:00 AM PST

Existing Home Sales: Survey: 5.05M Actual: 4.42M Prior: 4.97M

Existing Home Sales (MoM): Survey: 2.2% Actual: 4.0% Prior: 1.4%

Moody’s maintains Australia’s AAA Rating. Outlook stable.

Posted: 21 Dec 2011 06:27 AM PST

Outlook is stable
Sees debt levels being maintained.

The AUDUSD has not reacted to the news. The pair remains up on the day (close at 1.0078) but well below the high for the day at 1.02167. A move below the close for the day at the 1.0078 will not be welcomed. ON the topside a move above the 1.0125 (38.2% of the move down from the high today) and the 200 bar MA on the 5 minute chart below at the 1.0129 level is needed to push the pair higher.

EURUSD at support area (1.3017-1.3040)

Posted: 21 Dec 2011 05:35 AM PST

The EURUSD has continued the move lower in early NY trading and has moved below the 100 hour MA at the 1.3040 level. The next key target comes against the trendline off the hourly chart above at the 1.3017 level. I would expect profit taking buyers in this area as the holiday up and down action continues.

A move below the trendline is needed to turn the tide the other way. A move above the 1.3040 level will look toward the 1.3060 as the first upside target. The low from the opening came in at hte 1.3073 and the close from yesterday was at 1.3081. This should provide pause for cause on the topside on the first look today.

The massive ECB loan to banks ($645 billion) is a good thing. It will allow the banks to venture in to instruments like Spanish/Italy shorter term debt and earn carry profits that will replenish capital much the same way the Fed recapitalized the US banks by keeping rates low and basically saying “buy debt. Rates willl stay low for an extended period”. I would think that the ECB will also now keep rates low for an extended period of time and will use the fire power from programs like this to counteract the issues from austerity measures.

Canada Retail Sales Data Moves to 1.0% vs Survey of 0.5% and Prior of 1.0%

Posted: 21 Dec 2011 05:30 AM PST

Volatile/Illiquid markets dominate as ECB extends loans to member banks

Posted: 21 Dec 2011 05:21 AM PST

The NY Morning Techncial Commentary for Dec 21st 2011

Canada Retail Sales Data Due at 8:30AM

Posted: 21 Dec 2011 04:55 AM PST

The NY Forex Review and Preview

Posted: 21 Dec 2011 04:54 AM PST

Stocks and Commodities

DJI -3
S&P -2.6
Nasdaq -1.5
German Dax +0.11%
France CAC +0.06%
UK FTSE -0.01%
China Shanghai Index -1.12%
Nikkei Index +1.48%
Gold, -$0.05
Oil, +-$0.08

Key events and releases pre NY

ECB extends loans totaling 489B Euros ($645 billion) of 3 year loans to member banks at the average of it’s benchmark rate (currently at 1%). A total of 523 banks participated. This solves liquidity issues for banks and should also ease pressure on debt markets of troubled nations. Banks with excess funding can do what banks did in the US – buy bonds out the yield curve, fund with 1% funds and earn the interest rate carry profits and use the carry profits to recapitalize their balance sheets. It also alleviates some banks needs to rollover debt. Like in the US, I would not expect the excess reserves to go flowing into the economy. It is the central banks way to heal bank balance sheets in a time when risks of the assets are weakening.
German Import prices rose by 0.4% MoM vs -0.3% last month. YoY they rose by 6% vs estimate of 5.3%. The ECB is not as concerned about inflation pressures at the moment, having eased by 50 BP over the span of the last two meetings. The declines of course, helped lower the interest rate charged on the 3 year loans today to 1%.
BOE unanimous vote at the last MPC meeting the minutes show. They cited the pace of bond buying is close to the market’s capacity. Some thought more would be needed next year to weather the Euro storm. The target for bond purchases stayed at 275 billion pounds. The interest rate remained at 0.5%- a record low level. The purchases will be completed in January.
UK Public Sector borrowing comes in at 15.2 b vs 16.6 expectations.
US Mortgage Applications fell by -2.6% snapping a 2 week increase which saw mortgage applications rise by 12.8% and 4.1%. The Purchase index fell by -4.9% while the Refinancing index fell by -1.6%. The 30 year rate fell to 4.08 from 4.12% last week while the 15 year mortgage rate also declined to 3.39% from 3.44%. With the Fed overnight rate at 0.25% there is still plenty of carry profits for banks – as long as the Fed remains on hold.

Key Events and Releases in NY Session

8:30 AM ET, Canada Retail Sales MoM, Expectation 0.5% vs 1% last month. Ex Autos +0.2% vws +0.5% last month
10 AM ET, US Existing Home Sales is expected to rise to 5.05 M from 4.97 M last month. This is a 2.2% increase. The supply of home on the market came in at 8 months in October. This will also be eyed to see if supply is being sapped up at the lower mortgage rates
9:00 AM ET, Belgium NBB Business Climate. The estimate is for a decline to -11.8 from -12.2 last month.
6:45 PM ET, NZ GDP Q/Q. The estimate is for the 3Q to show a 0.6% gain vs 0.1% last quarter.
11:30 PM ET, Japans Shirakawa is scheduled to speak

FXDD Scheduled Webinar’s for today

10 AM ET, Ask the Chartist with James Chen
TO REGISTER: https://www1.gotomeeting.com/register/797393129

4 PM ET:
The Platform of the Week with Shawn Powell
TO REGISTER: https://www1.gotomeeting.com/register/856715465

OECD says the UK experienced the largest rise in labour costs- caused higher inflation.

Posted: 21 Dec 2011 03:09 AM PST

Unit labour costs in developed economies fell 0.3% in Q3.
Rise in productivity outstripped rise in pay during Q3.
Waged rose more rapidly in the Eurozone than in the US.

French gov’t says they “have no information” of a possible rating downgrade.

Posted: 21 Dec 2011 03:00 AM PST

Greek credit growth (Oct) -1.2% vs. -0.9% prior reading.

Posted: 21 Dec 2011 03:00 AM PST

ECB awards 489 bln EUR in 3 year financing loans vs. 293 bln expected.

Posted: 21 Dec 2011 02:25 AM PST

EUR/USD makes a new high of 1.3193 following the release.

AUD/USD testing 100 day moving average

Posted: 21 Dec 2011 01:52 AM PST

With the high of 1.0210, the pair tested resistance at the 100 day moving average. While on the way to testing this level, we also came close to completing a full hourly retracement of the move from the high on December 9th to the low on the 15th. Currently all risk currencies are losing their bullish momentum; European equities have also come off a bit.