Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Time to take the RED Pill - 28th May 24
US Economy Slowing Slipping into Recession, But Not There Yet - 28th May 24
Gold vs. Silver – Very Important Medium-term Signal - 28th May 24
Is Gold Price Heading to $2,275 - 2,280? - 28th May 24
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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

© 2005-2022 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