The currency blog

Sterling hit a 19-month high against the euro yesterday as investors shunned the single currency ahead of the closure of the European Central Bank’s emergency one year loan provision. With a July 1st deadline, banks have to repay €442bn of borrowed funds in the biggest amount lent in a single liquidity operation. Fears that a cash shortfall could total more than €100bn drove the pounds value above 1.23 euros. The one year loans can be rolled over and be replaced with three month loans at a base rate of 1%.
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After the short squeeze in the Euro over the last few weeks, the single currency has resumed its slide in almost every pair. The Euro dropped below a level not seen in over 18 months against Sterling and reached an all time low against the Swiss Franc. Swissy is increasingly seen as a safe haven currency along with the Dollar and has benefited from a renewed bout of uncertainty in the Eurozone. This Thursday sees the end of the ECB 12 month Long-Term Refinancing Operation (LTRO), implemented during the financial crisis to (supposedly) provide liquidity to Eurozone banks struggling to meet funding needs in the market. However, it seems many of the Banks used the funds speculatively rather than for funding. Borrowing from the ECB, banks made a classic carry trade by buying higher yielding bonds from periphery Eurozone and pocketed the difference in rates. At the time, these bonds were seen as a low risk. However, one year on, those bonds are seen as much more risky and funding the trade in the market may now be cheaper. The ECB are unwilling to extend the scheme for another 12 months instead preferring to roll over the funding for 3 months. The rollover on Thursday is likely to reveal some important information about the state of some banks given that market funding is now cheaper – any bank participating in the auction will show it has trouble in tapping the market for funds and the uncertainty over which banks this may be is feeding through to Euro weakness.
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After the short squeeze in the Euro over the last few weeks, the single currency has resumed its slide in almost every pair. The Euro dropped below a level not seen in over 18 months against Sterling and reached an all time low against the Swiss Franc. Swissy is increasingly seen as a safe haven currency along with the Dollar and has benefited from a renewed bout of uncertainty in the Eurozone. This Thursday sees the end of the ECB 12 month Long-Term Refinancing Operation (LTRO), implemented during the financial crisis to (supposedly) provide liquidity to Eurozone banks struggling to meet funding needs in the market. However, it seems many of the Banks used the funds speculatively rather than for funding. Borrowing from the ECB, banks made a classic carry trade by buying higher yielding bonds from periphery Eurozone and pocketed the difference in rates. At the time, these bonds were seen as a low risk. However, one year on, those bonds are seen as much more risky and funding the trade in the market may now be cheaper. The ECB are unwilling to extend the scheme for another 12 months instead preferring to roll over the funding for 3 months. The rollover on Thursday is likely to reveal some important information about the state of some banks given that market funding is now cheaper - any bank participating in the auction will show it has trouble in tapping the market for funds and the uncertainty over which banks this may be is feeding through to Euro weakness.

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Towards the end of last week concerns over debt crept back into the market psyche. It marked a disappointing end to the week which started so positively in response to China’s de-pegging of the CNY. The good news didn’t last as it became evident that there was still plenty of two-way risk on the CNY. Other key events were a new PM in Australia, who faces a difficult start in office over the contentious new mining tax and the G20 summit in Canada which took place yesterday.
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The pound strengthened to 1.22 against the Euro yesterday for the first time since November 2008. Sterling continues to benefit from the UK budget announced earlier this week and the news that one MPC member voted for a rate hike this month. A strong response from the credit agencies took away fears that the UK’s AAA rating could be downgraded.
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Fiscal consolidation is the flavour of the month both in Europe and the UK at the moment, but yesterday George Soros, billionaire investor, suggested that the deficit reducing measures pursued by Germany may end up causing the demise of the Euro. Mr Soros said that Germany should set out a growth led strategy to help member states regain competitiveness, not push them into a deflation cycle and impose economic stagnation. By raising taxes and cutting spending in an economy already short of domestic demand, the Germans are restricting other Eurozone countries ability to partly export their way out of trouble, and thus eventually having to pull out of the Euro. The comments by Mr Soros come after economist Paul Krugman warned the Germans that any fiscal consolidation before full economic recovery has taken hold would be counterproductive, and that now is not the time to be worry about deficits. Given the German stance on monetary and fiscal policy, Mr Krugman’s comments will have gone down like a lead balloon, but given the prominence his views are received in the US, it shows the beginnings of potential policy differences between the US and Europe. The Euro has traded down against both Sterling and the Dollar as new PMI data scaled back investors optimism of the economic recovery in the Eurozone.
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