*** Currency Market Analysis 07-12-2011 ***

[The Machine]

Markets seem to be taking a small breather this morning, as today’s open is a little more muted than usual coming off a very quiet overnight session. Sentiment is still favouring the bullish as North American futures point towards a slightly positive open. The euro was trending upwards until German officials downplayed French comments on the likelihood of a silver bullet for the markets. The Canadian dollar is also off this morning on the back of oil being down 0.5%. The Australian dollar was the big winner overnight after their GDP reading smashed estimates by coming in at 2.5% over the 1.9% consensus. Expect another trading day largely driven by headlines from our neighbours over the Atlantic.

European Central Bank Meeting

There are two major European meetings occurring this week, with the ECB holding its press conference tomorrow and the European summit being held on Friday. It seems a lot of things must go right over the next couple of days, starting with the press conference. Markets are calling for a 0.25% interest rate cut down to 1%, an expansion of the amount of collateral banks are acceptably allowed to post, and an extension of the maximum swap tenor at which banks can borrow.

These measures are an attempt to provide European banks with more breathing room until the politicians can (hopefully) work out their grand solution. As we have noted in previous World Market Updates, the European credit and money markets are under significant strain right now. Statistics were released last night showing that borrowing from the ECB by European banks increased sharply over the month of November, with a grand total of 34 banks going to the ECB lending window. The Italian region led the pack at 153.2 billion euros borrowed. This is a significant amount of money, highlighting the fact that the overnight markets in which banks typically tend to fund themselves is breaking down, if not freezing up completely.

An interesting graph came across our trading desk showing the privately held loan assets of the German Bundesbank over the last year. Since it has basically been the piggybank of the peripheral economies, its stock of assets has steadily declined as the loans outward have increased. It has essentially been selling its assets in order to fund its loan commitments, and as of the most recent statistics, it has 21.2 billion left. After this, only their gold assets will remain, and rest assured, they will never touch those. The point is that like the rest of the players, the German central bank seems to be approaching a crisis of sorts in the sense that if it is unable to lend anymore, the ECB will have no choice but to print money in an effort to support the PIGS: something that Germany has thus far so vehemently opposed.

European Summit

The market seems to be cautiously optimistic that a “powerful” deal will be reached after this meeting, proving that the euro is not in free-fall mode. People seem to think that there will be one of two outcomes: complete success or utter failure. But if previous EU events over the last year are any indicator, an outcome somewhere between the two is actually the more likely result.

France has taken to the optimist role, declaring that a final deal will be reached and that this deal will effectively solve the crisis. Germany has taken the pessimist road, quickly talking down any outlandish French statements and repeatedly referencing the significant issues that they must still overcome. Market direction for the rest of the week will no doubt be centered on this banter.

Interestingly enough, the Dow Jones and the euro now have a 0.85% correlation coefficient: a reading of one means that the two assets move in perfect lock-step, highlighting the effect that this saga is having on the rest of the world. With so much uncertainty surrounding the next couple days, be sure to consider potential risk management solutions should the market go one way or the other.

[darleneR]

Markets seem to be taking a small breather this morning, as today’s open is a little more muted than usual coming off a very quiet overnight session. Sentiment is still favouring the bullish as North American futures point towards a slightly positive open. The euro was trending upwards until German officials downplayed French comments on the likelihood of a silver bullet for the markets. The Canadian dollar is also off this morning on the back of oil being down 0.5%. The Australian dollar was the big winner overnight after their GDP reading smashed estimates by coming in at 2.5% over the 1.9% consensus. Expect another trading day largely driven by headlines from our neighbours over the Atlantic.

European Central Bank Meeting

There are two major European meetings occurring this week, with the ECB holding its press conference tomorrow and the European summit being held on Friday. It seems a lot of things must go right over the next couple of days, starting with the press conference. Markets are calling for a 0.25% interest rate cut down to 1%, an expansion of the amount of collateral banks are acceptably allowed to post, and an extension of the maximum swap tenor at which banks can borrow.

These measures are an attempt to provide European banks with more breathing room until the politicians can (hopefully) work out their grand solution. As we have noted in previous World Market Updates, the European credit and money markets are under significant strain right now. Statistics were released last night showing that borrowing from the ECB by European banks increased sharply over the month of November, with a grand total of 34 banks going to the ECB lending window. The Italian region led the pack at 153.2 billion euros borrowed. This is a significant amount of money, highlighting the fact that the overnight markets in which banks typically tend to fund themselves is breaking down, if not freezing up completely.

An interesting graph came across our trading desk showing the privately held loan assets of the German Bundesbank over the last year. Since it has basically been the piggybank of the peripheral economies, its stock of assets has steadily declined as the loans outward have increased. It has essentially been selling its assets in order to fund its loan commitments, and as of the most recent statistics, it has 21.2 billion left. After this, only their gold assets will remain, and rest assured, they will never touch those. The point is that like the rest of the players, the German central bank seems to be approaching a crisis of sorts in the sense that if it is unable to lend anymore, the ECB will have no choice but to print money in an effort to support the PIGS: something that Germany has thus far so vehemently opposed.

European Summit

The market seems to be cautiously optimistic that a “powerful” deal will be reached after this meeting, proving that the euro is not in free-fall mode. People seem to think that there will be one of two outcomes: complete success or utter failure. But if previous EU events over the last year are any indicator, an outcome somewhere between the two is actually the more likely result.

France has taken to the optimist role, declaring that a final deal will be reached and that this deal will effectively solve the crisis. Germany has taken the pessimist road, quickly talking down any outlandish French statements and repeatedly referencing the significant issues that they must still overcome. Market direction for the rest of the week will no doubt be centered on this banter.

Interestingly enough, the Dow Jones and the euro now have a 0.85% correlation coefficient: a reading of one means that the two assets move in perfect lock-step, highlighting the effect that this saga is having on the rest of the world. With so much uncertainty surrounding the next couple days, be sure to consider potential risk management solutions should the market go one way or the other.

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