FX Global currency watch
fold”, but as explained here the
technical momentum and
stochastic signals would also be rolling over and we would expect this combination to lead to at least a look at the 1.1877 level.
A
s for the success of the Longer Term Refinancing Operations (LTRO) by
the ECB, the jury is definitely out and we think upon closer exami n a t io n by markets, perhaps over the
and summer period,
spring a
r e v e rsa l in current s e nt i m e nt towards the Euro may emerge and ignite the downturn.
The LTRO is basically a means whereby the ECB will provide l iq u id it y to those European banks
This year, through the LTRO
mechanism, 800 banks borrowed around 530 billion Euros at one percent
in need to a
virtually unlimited extent and also at ultra-low rates of interest. This way, the banks can ‘pay’ for their maturing debt obligations and also lend to other struggling entities such as consumers or local governments etc.
12 FX TRADER MAGAZINE April - June 2012
will be a game-changer. Amazing that the market is so calm and we are only around 200 billion Euro away from this tipping point. Admittedly, these figures do not include maturing loans, so the number is actually smaller, but the trend is still disturbing.
The LTRO mechanism itself was first launched last December when 523 banks borrowed just under 500 billion Euros. In round 2 earlier this year, 800 banks borrowed around 530 billion Euros at one percent.
Market pundits believe that should this borrowing demand rise beyond 750 billion Euros, it
Creating money out of thin air does not usually lead to a good outcome for a currency.
Some observers make the case that the ECB’s LTRO is very similar to the Fed’s QE move, albeit
somewhat more belated
in inception and on a different scale. The move has been widely referred to by FX traders as t a n t amo u n t to ‘kicking the can down the road’ because the ECB simply cannot
or
will not treat the inherent problem of what
have
become known as ‘zombie banks’; rather, they continue to
feed beasts.
As we all know, in dire sit u a t io n s the mere treatment of symptoms does
not provide the much-needed cure. So while Q1 of 2012 was absorption of the news and some relief that the whole system did not implode, once the market finds its equilibrium we expect a rise in negative sentiment towards the single currency as
these
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