Renewed concern for the European banking system has pushed the euro to a 16-month low against the dollar. At 9:21 am in New York, the Euro had fallen to $1.2805.
The move was triggered by an increase in France’s borrowing costs when the interest on 10-year bonds rose to 3.29 percent compared to last month’s auction where 10-year notes sold at 3.18 percent. In December, France’s triple-A credit rating was put on watch in what many feel is the first step towards an inevitable downgrade.
Eurozone banks have rushed to take out cheap three-year loans offered by the European Central Bank, borrowing 489bn euros ($643bn; £375bn). The central bank had originally hoped to lend up to 450bn euros to stop another credit crunch crippling the banking system.
“The very heavy take-up of the ECB’s three-year, long-term refinancing operation provides some encouragement that banks’ liquidity needs are being amply met,” said Jonathan Loynes at Capital Economics.
“But while this might help to address recent signs of renewed tensions in credit markets and support bank lending, we remain sceptical of the idea that the operation will ease the sovereign debt crisis too as banks use the funds to purchase large volumes of peripheral government bonds.”
‘Positive number’
Source: BBC News
Tomorrow is the rate policy meeting decision Down Under and market expectations are for a possible 25 bp rate reduction. However, inflation metrics have been moving higher and the Australian economy has been chugging along despite the problems in the Euro zone that could lead to a global recession.
Looking at the chart below, the Aussie (AUD) has been gaining steadily, especially after last week’s swap line reduction to try to provide liquidity to the global banking system. Were it not for the Euro zone crisis, global appetite for risk would be much higher and the Aussie would stand to benefit.
The RBA has been known to take a wait and see approach to rate-setting so perhaps this will be a time when they may do the same. There is good support for the AUD/USD pair at 1.0230 so a non-action by the RBA makes for a good trade that could produce a 2:1 reward/risk.
Therefore, the target for the Aussie is at 1.0425, using a stop just below support at 1.0230.
Eurozone officials continue to hammer away at a Eurozone rescue plan rumored to be in the range of 2 trillion euros ($2.7tn). The plan also calls for a 50 percent write-down in Greece’s debt that will force investors to accept less as Greek debt matures.
Stock markets have seen deep losses during the past two weeks and Eurozone officials have been accused of reacting too slowly to the deteriorating outlook for Greece and other indebted nations in the Eurozone. The greatest concern should one of these countries default – and most are focused on Greece at this time – is the damage this could do to the European banking system as most of the larger financial institutions are heavily exposed to sovereign debt.
Source: BBC News
The Swiss National Bank (SNB) provided 120 billion Swiss francs (US$152 billion) to the Swiss banking system to increase the currency supply in a bid to ease the rapidly climbing franc. The Swiss franc continues to grow in popularity as a safe haven alternative to the U.S. dollar and the euro. Earlier in the week the SNB even raised the possibility of pegging the franc to the euro but the latest action casts doubt on whether the SNB will go in this direction.
“The market was expecting far more radical measures from the SNB, like targeting a specific exchange rate. This is more of the same, and is inadequate in an environment where investors are seeking safe havens,” noted Lena Komileva of Brown Brothers Harriman.
Source: BBC News
The results of the so-called stress tests designed to identify European banks in need of recapitalization will be released later today. The expectation is that up to fifteen financial institutions will be identified as under-funded and in jeopardy.
The International Monetary Fund has warned Europe it is taking too long to rebuild its banking system and has lagged the repair work done in the United States since the financial crisis, while the threat of the Greek debt crisis spreading to bigger countries such as Spain and Italy has rattled investors and dragged European bank shares to a two-year low.
Source: Reuters
A source within the Eurozone banking system said that up to fifteen European banks could fail the so-called “stress” tests designed to accurately report the viability of the region’s banking system. This estimate is double last year’s results that were deemed too ineffective in rooting out those institutions at risk of failure.
Most of the failed banks are expected to be in Greece, Germany, Portugal, and Spain and officials are already working behind the scenes to shore up the affected balance sheets.
Source: Reuters
The Bank of Japan added another $98 billion to yesterday’s 183 billion earmarked to support the country’s banking system in the face of the ongoing crisis. The injection came in two stages; the first of 5tn yen took place in the morning, the second after reports of increased radiation leaks.
Japan is currently dealing with a massive clean-up operation, the threat of nuclear meltdown, power shortages and significant economic disruption. All told, it will probably cost Japan hundreds of billions of dollars to rebuild after the earthquake and tsunami that hit the country.
Source: BBC News
The Canadian dollar fell more than two cents as investors fled to the perceived safety of the American dollar as the crisis in Japan continues to plague markets. Oil prices also plunged by more than $3.50 to $97.50 a barrel.
Source: The Canadian Press
The European Central Bank said today that it is making up to 131.9 billion euros ($161.5 billion) in loans available to European banks for the next three months. This is considerably less than expected and suggests that banks are in better financial shape than thought originally.
Banks tomorrow need to repay 442 billion euros in 12-month funds, the biggest amount ever awarded by the ECB and a key plank in its efforts to fight the financial crisis last year. Demand for the three-month cash today was a litmus test for the health of Europe’s banking system, economists said.
Demand was “surprisingly low and certainly a lot less than markets expected,” said Nick Kounis, chief European economist at Fortis Bank NV in Amsterdam. “It suggests that while there are certainly stresses in the system in some regions, it’s not as bad across the board as many people thought.”
Source: Bloomberg
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