Euro - without the right to rise. Fundamental analysis for 10.06.2014
10.06.2014
The Eurodollar resumed its decline – most likely, the beginning of the struggle with low inflation from the ECB and the sufficiently strong report on the U.S. labour market finally inspired the bears go into "new exploits." Let me remind you: last week, Mario Draghi followed through with his promise to do everything possible to save the euro, and did an unprecedented thing for the world's central banks - dropped the deposit rate to a negative level of -0.10%.
It is worth noting that in the first two rounds of the ECB LTRO gave banks three-year loans in the amount of close to 1 trillion euros. Currently, the banks have repaid about half of this debt, which led to a regular outflow of liquidity from the financial system. If the euro zone economy showed steady growth, this process would likely have gone unnoticed, but serious recovery in the euro area is nowhere to be seen.
In other words, the ECB simply restored the status quo by again offering the banks to borrow money returned from the previous LTRO. In addition, the regulator has stopped the "sterilization" of liquidity from bond purchases in 2010 and 2011. All of these measures have already led to the downfall of one of the key rates of Eonia (rate on overnight bank loans) to the lowest level since the inception of the euro zone 0.053%.
Overall, the market reaction is still weakly correlated with the decisions taken. This is partly due to the fact that the future impact of these vociferous actions from the ECB is far from obvious. In the early rounds of LTRO the banks were generally offered a win-win strategy - with the borrowed funds from the ECB to buy Eurobonds with sufficiently high interest rates and earn foreign exchange gains.
Now the banks are offered to go into the real economy and finance small and medium businesses. Everything would be fine if not for a significant proportion of bankruptcies, in which case the banks are at risk of failing to recover their loans, while maintaining the commitment to the ECB. In such circumstances, risk aversion on the part of banks is growing, and many will prefer to pay the ECB a negative deposit rate than lend to risky borrowers.
After the publication of the report on the U.S. labour market, I turned over to sales, and so far this strategy pays off. Although the ECB meeting did not led to a sharp collapse of the currency pair, the bearish trend for the market has been confirmed. Think about it: in a situation where the ECB lowers rates to historic lows and gives out almost half a trillion of liquidity for a few years, the growth of the euro would be nothing more than a fantasy.
RoboForex Analytical Department
It is worth noting that in the first two rounds of the ECB LTRO gave banks three-year loans in the amount of close to 1 trillion euros. Currently, the banks have repaid about half of this debt, which led to a regular outflow of liquidity from the financial system. If the euro zone economy showed steady growth, this process would likely have gone unnoticed, but serious recovery in the euro area is nowhere to be seen.
In other words, the ECB simply restored the status quo by again offering the banks to borrow money returned from the previous LTRO. In addition, the regulator has stopped the "sterilization" of liquidity from bond purchases in 2010 and 2011. All of these measures have already led to the downfall of one of the key rates of Eonia (rate on overnight bank loans) to the lowest level since the inception of the euro zone 0.053%.
Overall, the market reaction is still weakly correlated with the decisions taken. This is partly due to the fact that the future impact of these vociferous actions from the ECB is far from obvious. In the early rounds of LTRO the banks were generally offered a win-win strategy - with the borrowed funds from the ECB to buy Eurobonds with sufficiently high interest rates and earn foreign exchange gains.
Now the banks are offered to go into the real economy and finance small and medium businesses. Everything would be fine if not for a significant proportion of bankruptcies, in which case the banks are at risk of failing to recover their loans, while maintaining the commitment to the ECB. In such circumstances, risk aversion on the part of banks is growing, and many will prefer to pay the ECB a negative deposit rate than lend to risky borrowers.
After the publication of the report on the U.S. labour market, I turned over to sales, and so far this strategy pays off. Although the ECB meeting did not led to a sharp collapse of the currency pair, the bearish trend for the market has been confirmed. Think about it: in a situation where the ECB lowers rates to historic lows and gives out almost half a trillion of liquidity for a few years, the growth of the euro would be nothing more than a fantasy.
RoboForex Analytical Department
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Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex bears no responsibility for trading results based on trading recommendations described in these analytical reviews.