For a moment there, it looked as through all it would take for EUR/USD to break free above 1.45 was SPX to hold 1200.
Just when EUR/USD was threatening to make a run for it out of its trading range, along came two stories to send it crashing back into neutrality. Firstly, the US equity market ran out of steam. SPX had poked its nose above 1200 but ended with a bit of a whimper. 1180 is probably still the critical psychological support for now. Slightly more serious was the news that some European banks was borrowing more dollars from the ECB last week (nope..), while the NY Fed is taking more of an interest now in those banks’ access to dollar funding. Maybe the bottom line though, is that 10 days after another confidence crisis in Europe, the euro’s doing fine and risk sentiment has stabilized. The ability to ignore slightly poor news could be a sign that if we get better data in September we’re going to see higher equity indices and a higher euro too.
In other ‘perverse moves’ GBP is strong, and the Swiss franc rather soggy. No news out there at all to suggest GBP/CHF should head higher – beware UK retail sales data due this morning – probably the toughest data point to forecast in the monthly calendar, but in danger of being negative. If you are a ‘risk off’ sort of a person, short GBP/CHF could be the ‘trade du jour’ for you.
The US sees weekly jobless claims, CPI, existing home sales and the Philly Fed data. Plenty to chew on there. Claims likely bounced but the market should not be fazed by that. It’s the regional Fed indices which interest me most at the moment. they were the canary in the coal mine which warned that things were getting a lot worse through May/June, and have the potential to send the opposite signal in the weeks ahead – pointing to the end of the world not being imminent.
Meanwhile, the world Gold Council reports that India and China made up the bulk of demand for actual gold in Q2 and conclude the demand story remains very strong. They are an interested party of course, but USD 1800/Oz is firmly in the market’s sights today. We exited out long gold, short EUR and USD trade last week -and now we don’t know where to re-engage. Oops.
Note on foreign bank funding mechanism (Seb) and why it plays a secondary role: In a large credit crisis, foreign banks find it increasingly difficult to fund their local assets. Increasingly, they are pushed to ever lower maturities as credit risk drops sharply the shorter the time bucket. The quality of the collateral they can use becomes also increasingly at a premium. The outcome is to leave these banks exposed to move in the shorted dated rates and a duration risk.
To reduce that problem they can swap assets back from their home markets where they have access to a deposit base and their own central bank funding. This shift was one of the major mechanisms for the collapse of EURUSD in Jan/Feb 2010. Since that time, banks have reportedly matched their long term funding per currency as we expected ( and confirmed reportedly from a recent Golden analyst report). The issue is therefore potentially in short term funding for institutions that are able to have gigantic USD balance sheets outside of their home territories but are exposed to mismatches in funding. The WSJ reported that regulators were looking into this mechanism, presumably because if it ever kicks in, it would send the USD higher. This “lever” has been tried and failed in past weeks and months as 2010 is a rather recent experience. This mechanism was relevant in Korea/Russia in 2008/2009 and Europe in May 2010. Since then the liquidity regulatory framework has been sharply tightened outside of the US.
Methodology: Banks use an approach of bucket liquidity looking at expected inflows and outflows of funds at different time buckets and stress testing this outcome or using economic scenarios and hedging their outcome. In the old days of last year, this was likely not including a differentiation for the ability to access Central Bank funding. One can have conditional funding agreements which can be tested but are not necessarily usable depending on the shape of the crisis and the people involved.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/08/sg-forex-daily_1108182.pdf
Societe Generale
Research & Analytics