Currency TERM Today Monday Friday Thursday Wednesday Tuesday
USD ON 4.40 4.4175 4.3025 4.30 4.34 4.4325
  1M 4.94875 4.965 4.99625 5.0275 5.1025 5.20375
  3M 4.92625 4.94125 4.96625 4.99063 5.057 5.11125
EUR ON 3.8275 3.98875 3.85875 4.04625 4.055 4.05
  1M 4.58813 4.92375 4.93375 4.935 4.945 4.9225
  3M 4.84875 4.94688 4.94688 4.94938 4.9525 4.92688
GBP ON 5.5975 5.5975 5.600 5.60875 5.685 5.7000
  1M 6.49125 6.54125 6.5925 6.60375 6.74625 6.73875
  3M 6.38625 6.43125 6.49625 6.51375 6.62688 6.625

Seems coordinated – move working as expected.

The sizes should be unlimited- it’s about price and not quantity – the size of the operations doesn’t alter net reserve balances.

All they are doing/can do is offering a lower cost option to member banks, not additional funding.

Bank lending is not constrained by reserve availability in any case, just the price of reserves.

Bank lending is constrained by regulation regarding ‘legal’ assets and bank judgement of creditworthiness and willingness to risk shareholder value.

The Fed’s $ lines to the ECB allows the ECB to lower the cost of $ funding for it’s member banks. To the extent they are in the $ libor basket that move serves to help the Fed target $ libor rates.

Regarding the $:

As per previous posts, when a eurozone bank’s $ assets lose value, they are ‘short’ the $, and cover that short by selling euros to buy $.

The ECB also gets short $ if it borrows them to spend. So far that hasn’t been reported. There has been no reported ECB intervention in the fx markets, nor is any expected.

When the ECB borrows $ to lend to eurozone banks it is acting as broker and not getting short $ per se. It is helping the eurozone banks to avoid forced sales/$ losses of $ assets due to funding issues. If the assets go bad via defaults and $ are lost that short will then get covered as above.

‘Borrowing $ to spend’ is ‘getting short the $’ regardless of what entity does it. So the reduction in credit growth due to sub prime borrowers no longer being able to borrow to spend was ‘deflationary’ and eliminated a source of $ weakness.

The non resident sector is, however, going the other way as they are increasing imports from the US and reducing their deflationary practice of selling in the US and not spending their incomes.

Portfolio shifts- both by domestics and foreigners- out of the $ driven by management decision (not trade flows) drive down the currency to the point where buyers are found. The latest shift seems to have moved the $ down to where the the real buyers have come in due to ppp (purchasing power parity) issues, which means that in order to get out of the $ positions the international fund managers had to drive the price down sufficiently to find buyers who wanted $ US to
purchase US domestic production.

These are ‘real buyers’ who are attracted by the low prices of real goods and services created by the portfolio managers dumping their $ holdings. They are selling their euros, pounds, etc. to obtain $US to buy ‘cheap’ real goods, services, real estate, and other $US denominated assets.

Given the tight US fiscal policy and lack of sub prime ‘short sellers’ borrowing to purchase (as above), these buyers can create a bottom for the $ that could be sustained and exacerbated by some of those managers (and super models) who previously went short ‘changing their minds’ and reallocated back to the $US.

Seems US equity managers are vulnerable to getting caught in this prolonged short squeeze as well.

It’s been brought to my attention that over the last several years equity allocations us pension funds- private, state, corporate, etc – have been gravitating to ever larger allocations to non US equities, and are now perhaps 65% non US.

This is probably a result of the under performance of the US sector, and once underway the portfolios are sufficiently large to create a large, macro, ‘bid/offer’ spread. The macro bid side for the trillions that were shifted/reallocated over the last several years was low enough to find buyers for this shift out of both the $ and the US equities to the other currencies. And the shift from $ to real assets also added to agg demand and was an inflationary bias for the $US.

Bottom line – changing portfolio ‘desires’ were accommodated by these portfolios selling at low enough prices to attract ‘real buyers’ which is the macro ‘bid’ side of ‘the market.’

When portfolio desires swing back towards now ‘cheap’ $US assets and these desires accelerate as these assets over perform they only way they can be met in full is to have prices adjust to the ‘macro offered side’ where real goods and services, assets, etc. are reallocated the other direction by that same price discovery process.

more later!


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