Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Want To Earn A Safe 5% In Fixed Income? Buy Preferred Stocks - 24th April 19
Can Gold Price Rise Without a Rate Cut?  - 24th April 19
Silver’s Next Big Move - 24th April 19
How Can a College Student Invest Wisely? - 24th April 19
Prepare For Unknown Stock Market Price Action As New Highs Are Reached - 23rd April 19
Silver Plays a Small but Vital Role in Every Portfolio - 23rd April 19
Forecasting 2020s : Two Recessions, Higher Taxes, and Japan-Like Flat Markets - 23rd April 19
Gold and Silver Give Traders Another Buying Opportunity - 23rd April 19
Stock Market Pause Should Extend - 21st April 19
Why Gold Has Been the Second Best Asset Class for the Last 20 Years - 21st April 19
Could Taxing the Rich Solve Income Inequality? - 21st April 19
Stock Market Euphoria Stunts Gold - 20th April 19
Is Political Partisanship Killing America? - 20th April 19
Trump - They Were All Lying - 20th April 19
The Global Economy Looks Disturbingly Like Japan Before Its “Lost Decade” - 19th April 19
Growing Bird of Paradise Strelitzia Plants, Pruning and Flower Guide Over 4 Years - 19th April 19
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19
Online Grocery Shopping Will Go Mainstream as Soon as This Year - 17th April 19
America Dancing On The Crumbling Precipice - 17th April 19
Watch The Financial Sector For The Next Stock Market Topping Pattern - 17th April 19
How Central Bank Gold Buying is Undermining the US Dollar - 17th April 19
Income-Generating Business - 17th April 19
INSOMNIA 64 Birmingham NEC Car Parking Info - 17th April 19
Trump May Regret His Fed Takeover Attempt - 16th April 19
Downside Risk in Gold & Gold Stocks - 16th April 19
Stock Market Melt-Up or Roll Over?…A Look At Two Scenarios - 16th April 19
Is the Stock Market Making a Head and Shoulders Topping Pattern? - 16th April 19
Will Powell’s Dovish Turn Support Gold? - 15th April 19
If History Is Any Indication, Stocks Should Rally Until the Fall of 2020 - 15th April 19
Stocks Get Closer to Last Year’s Record High - 15th April 19
Oil Price May Be Setup For A Move Back to $50 - 15th April 19
Stock Market Ready For A Pause! - 15th April 19
Shopping for Bargain Souvenirs in Fethiye Tuesday Market - Turkey Holidays 2019 - 15th April 19
From US-Sino Talks to New Trade Wars, Weakening Global Economic Prospects - 14th April 19
Stock Market Indexes Race For The New All-Time High - 14th April 19
Why Gold Price Will “Just Explode… in the Blink of an Eye” - 14th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Charting Euro Macro, Yields and LIBOR Interest Rate Spreads

Interest-Rates / ECB Interest Rates Nov 11, 2011 - 06:43 AM GMT

By: Ashraf_Laidi

Interest-Rates

Best Financial Markets Analysis ArticleWednesday's 2% decline in EURUSD was the only 3rd of such magnitude over the past 3 years. There have been five of + or 2% in the last 3 years, 2 of which occurred last month; (-2% Oct 31 after referendum announcement and +2% on Oct 27 after the EFSF/Troika/recap deal). Yesterdays 13% surge in EURUSD 1-month volatility typified the broadening rise in the currency's volatility as of late.


Now that Italian 10-year yields broke over 7% and the spread over their German counterpart hit 5.58%, how many days will it take before getting help, or for the austerity package to finally be passed? Greece, Ireland and Portugal were each bailed out 18 days, 15 days and 55 days after their yields hit 7% respectively. See the chart below:

Greece was bailed out on May 2nd, 2010 with an 8.5% yield and 546 bps over German spreads. Ireland's bail-out followed on November 2010 with an 8.09% yield and 544-bp spread. Portugal's bailout occurred at 8.54% bps and 510-bp spread. Italy's 10-year spread currently at 5.58% fits the schedule of the timing of prior bailout (or for austerity to be passed). With Italys new coalition govt. unlikely to be formed until around the Christmas break, counting 40-50 days from today's 7% breach, matches the 55 days it took for Portugal to obtain its bailout after the 7% hit.

Euro-USD 3 Month LIBOR Spread at 7 Month Lows

As Eurozone banks rush into raising USD funding to alleviate the unfolding liquidity crunch, the cost of USD funding has risen further, thereby helping to stabilize USD. The cost of USD funding as measured by USD 3-month LIBOR surged 80% from the summer lows, reaching 0.4497%--at the highest level since June 2010. As Eurozone 3-month LIBOR fell to 5-month lows at 1.4270%, the spread of Eurozone 3-month LIBOR over its USD counterpart fell to 0.977, the lowest in 7 months.

We mentioned the EU-US LIBOR spread in our September 21 piece when it stood at 1.31%. Now that the ECB is in full easing stance, the effect of its stepped up Securities Markets Programme (SMP) could be a net negative on the single currency. In other words, when ECB LIBOR is falling partly due to anticipated easing (instead of improved liquidity conditions), the FX impact tends to be negative. The ECB bought EUR 183 billion in PIIGS bonds since May 2010. Once the ECB reaches (and will be forced to reach) about EUR 300-400 bln in purchases, it will remain doubtful whether it could continue to sterilize (later withdraw) these purchases. Once it no longer withdraws these injections, we would expect the currency impact to be negative (as was the case with outright QE from the Fed).

Germany Already in Contraction

6 weeks after we made the case for a German economic contraction here, the numbers appear to be heading that way. Even the ECB is uncharacteristically admitting a mild recession in the Eurozone. Germany's Ifo business climate and ZEW investor surveys all point to a deepening slowdown, while the manufacturing and services PMI are also showing the same patterns as in the 2007 recession. As Germany's economic dynamics worsen, they will further force the ECB into more activist easing, with an emphasis on boosting growth, while relegating inflation priorities to statistical records as all other major central banks have started to do.

Technically, we stick with our revised forecast of $1.32 by end-month, while the $1.27 call is now being pushed into mid Q1 2012. Most striking about the euros 8.5% rebound in October 4-27th, is that half of those gains were lost in the ensuing 3 days. Three days.

Get your free 1-week trial to our Premium Intermarket Insights on FX, commodities & equity indices.

For more frequent FX & Commodity calls & analysis, follow me on Twitter Twitter.com/alaidi

By Ashraf Laidi
AshrafLaidi.com

Ashraf Laidi CEO of Intermarket Strategy and is the author of "Currency Trading and Intermarket Analysis: How to Profit from the Shifting Currents in Global Markets" Wiley Trading.

This publication is intended to be used for information purposes only and does not constitute investment advice.

Copyright © 2011 Ashraf Laidi

Ashraf Laidi Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules