We had forecast a bounce back for the euro at the beginning of the week and she asserted herself yesterday following strong debt auctions from two of the peripheries most beleaguered members and a press conference from Mario Draghi that signalled that monetary policy is likely to stay “as is” for the next couple of months at least. GBPEUR broke back into the 1.19s for the first time in 7 trading sessions and EURUSD retraced strongly above the 1.28 mark.
Bond auctions used to be one of, if not the, most boring event in markets a couple of years ago. Nobody really gave a monkey’s apart from the people who actively traded the market. Nowadays they are keenly anticipated events that have everyone on the edge of their seats. Well about as “edge of the seat” as you can get. Spain managed to get away EUR9.98bn versus their target of EUR5bn, with demand strong and yields lower while Italy sold all EUR12bn that they wanted to get away, with yields half of what they were at the previous auction in December. There are three caveats to these impressive auctions however.
Firstly, we are not sure, and won’t be for a couple of days, how much of that demand came from the European Central Bank’s bond buying programme as that demand, in the strictest terms, doesn’t really count. It’s demand but artificial demand.
Secondly, we have to look at these auctions in light of recent liquidity measures from the ECB. As we know, the ECB opened the taps to banks in December by extending the time that banks could take advantage of the LTRO up to 3 years. Banks can borrow as much money as they want, at a rate of 1% for up to 3 years, as long as they put down collateral. In this case the collateral is normally sovereign debt and herein lies the rub. It is very likely that the banks’ demand for the debt is merely as a “carry trade”; borrow money cheaply (from the ECB at 1%) and invest it in European debt for a return of 3-5% making the difference in-between.
Thirdly, these were short term auctions with the Italian paper no longer than a year out. The curves are no longer inverted and therefore these declines in yields are largely to be expected.
So while these plans will have possibly solved the short-term liquidity problems in the Eurozone, the long term structural problems at the heart of the continent still remain and will take more than loans to fix.
Draghi’s press conference post the ECB’s decision to hold rates at 1% was not as full of fear as some people had expected. The ECB president did warn that the economic outlook for the Eurozone remains “subject to high uncertainty and substantial downside risks” but that the decision to hold rates was unanimous. We are expecting rates to move lower by 25bps by March, but whether that happens in February or later is still up for debate. My feeling is that they will wait and see how the GDP figures for Q4 play-out and move in March.
The Bank of England was suitably dull yesterday holding rates at 0.5% and not increasing asset purchases from their level of £225bn. There was little market reaction to this.
We have another Italian auction today, this time of longer termed debt, and that too will be closely monitored for signs of recovery. We should get the results at around 10.15 GMT. Data comes in the form of US consumer confidence at 14.55 which is expected to improve from 69.9 to 71.5.
Indicative Rates Sell Buy
GBPEUR 1.1938 1.1967
GBPUSD 1.5355 1.5382
EURUSD 1.2849 1.2872
GBPJPY 117.75 118.03
GBPAUD 1.4825 1.4852
GBPNZD 1.9347 1.9376
GBPCAD 1.5622 1.5651
NZDUSD 0.7928 0.7947
GBPZAR 12.33 12.38
USDZAR 8.0234 8.0580
GBPPLN 5.2602 5.2870
EURJPY 98.50 98.78
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