EUR/USD (1.2870) Maybe the most important revelation in yesterday’s ECB press conference was that the banks that borrow via the LTRO are not the same ones that re-deposit money overnight. Probably because the amounts are similar, there had been a common assumption that liquidity had been leaving by one door at the ECB and then re-entering by another. This would mean that the policy was ineffective. However, we now know that the borrowers and depositors are not the same. Deposits might have been near current levels anyway. Mercifully, one could argue, the ECB is dispatching back into the system again. It also means that the borrowed money is being put to use, probably, given the decline in sovereign yields, for purchasing government bonds. So the policy is working. Indeed, as yields stabilise and fall, debts, and deficits and ratings become more predictable, even the depositors might find sovereign debt more attractive. The LTRO might therefore prove to be the tool that reverses the vicious cycle that is the eurozone debt crisis.
The euro responded positively to bond auction news yesterday. Shortterm traders had been anticipating a short-squeeze for some time, which is why we used the bounce to embark on a new bearish strategy. As the press conference news was digested, however, the euro even overtook our 1.2865 hurdle. This gives it a chance to climb to 1.2970, but it should only gain lasting stability above 1.3080.
Market Bias Index
Although the single-currency is still likely to be perceived as undervalued, bias shrunk across the board. In the case of EUR/GBP it has almost returned to fair-value.
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Deutsche Bank
Fixed Income Research – Global