On 30 January 2013, 3y loans worth EUR 137.159bn will be repaid to the ECB, reducing initial tender volume from EUR 489bn to EUR 352bn. Total volume of the two 3y tender operations will fall to EUR 881.4bn. We assume stronger banks particularly will repay funds, while weaker counterparts will continue to rely on ECB liquidity. Even after the initial repayment, excess liquidity in the euro money market will remain high at around EUR 450bn. Repayments announced last Friday suggest that in recent months some European banks have become less stressed concerning euro bond market funding, due to the steadily improving Eurozone situation. Due to them, we expect the ECB’s balance sheet to decrease accordingly. While at the same time also indicating less risk of a break-up, lowering the euro risk premium, the ECB balance sheet is now contracting while the Fed’s continues to expand by USD 85bn each month. The first repayment unveiled last week will be followed by additional weekly announcements going forward, with focus on especially Feb 22 when banks will have the opportunity to prepay also the second EUR 529bn tender operation. This will potentially further diminish the size of the European central bank’s balance sheet, especially since we do not expect banks to offset repayments of 3y loans with shorter maturities. While plenty of excess euro money market liquidity remains, ongoing repayments could continue to boost market rates going forward. Absent ECB efforts to offset this by cutting its refi rate from currently 0.75%, this should probably support the euro against the dollar, strengthening our case indicating further upside potential in the currency pair. Consistent with our Currency Strategy report last week we expect EUR/USD to break above 1.35 targeting levels around 1.36/38 before the summer due to possible further spread compression between German and peripheral rates supporting the euro while improved risk appetite continuing to weigh on the USD.
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SEB tech team