Posts tagged 'Euro'

Brexit, the Target2 angle

Everybody knows much of the City of London was vehemently opposed to Brexit because of fears of what might happen to banks’ interests if so-called “passporting” rights into and out of the European system were lost.

What is less talked about, however, is Brexit’s impact on the European payments clearing system, Target2 — and how the passporting issue connects by way of Target2 to the realm of sovereign monetary policy.

At the absolute heart of the matter is the status and treatment of payment systems worldwide, and whether or not they can really be treated as something independent and thus distinct from national monetary policy (and hence open to commercial competition) — or as integral to sovereign interests. Read more

Brexit and the UK’s euro-clearing exposure

If you’re bored of Brexit “scaremongering”, this post is not for you.

For us, the following seems a much-underappreciated negative side-effect. And it’s fascinating one too (especially if you’re a fan of the “eurodollar financing caused this entire financial mess” angle). Read more

Remember Target2 imbalances? Well, they’re back…

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Was a weak euro last year’s necessity?

An important question for anyone who thinks the euro area needs to keep its currency weak to grab foreign demand. Or who thinks that’s what the ECB thinks, anyway.

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Currency wars everywhere, euro and underwhelming excess reserves edition

First, on the rather small proportion of euro area bank balance sheets taken up by excess reserves, charted by Credit Suisse’s Neville Hill and Peter Foley:

Or: Read more

How the ‘euroglut’ thesis became a reality

Kudos to George Saravelos at Deutsche Bank for calling out Europe’s euroglut problem more than a year ago — because, as Saravelos was keen to point out on Tuesday, what was once a thesis is now a reality.

As he notes:

The Eurozone has experienced a historically unprecedented shift in portfolio flows, with net fixed income outflows running at a staggering 500bn EUR over the last twelve months, the largest on record. These flows are mostly directed towards US bond markets and have exceeded the Eurozone’s current account surplus. They have pushed the basic balance into deficit over the past year contributing to EUR/USD weakness.

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The ECB is different (and should be treated as such)

We wrote — when talking about the ECB’s potential move to a tiered depo facility which would allow a deeper cut than expected into negative territory on Thursday — that Draghi was in the somewhat relaxed position of being able to follow where other central banks had gone before.

We were of course referring to the Swiss and Danish central banks, which are currently at -75bps versus the ECB’s -20bps and have in place versions of the tiered model being mooted for the ECB.

But… Nomura’s Jens Nordvig thinks we were being too casual in our comparison. The ECB needs to be analysed as its own central bank because: Read more

On the Swiss franc’s non strength

Remember when the SNB stopped defending its floor against the euro in January and the Swiss franc’s value surged? Not so much on Friday:

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One way the euro has become a lot more like the dollar

When Nixon’s treasury secretary told his European counterparts the dollar was “our currency, but it’s your problem”, he was referring to the tendency of foreigners to borrow and lend to each other using American money. The importance of these so-called eurodollars in other countries’ financial systems inadvertently gave American policymakers significant influence over credit flows outside their borders.

(This is still true: a rising dollar tightens financial conditions abroad, while a falling dollar encourages foreigners to lever up.)

Some Europeans wrongly thought this was deliberate and determined to rectify the situation by creating a competitor currency capable of functioning as a “global reserve”. A few even dreamed the euro would supplant the dollar. Read more

The euro was pointless

It’s easy to forget now, but the single currency wasn’t created purely as a political project.

Many economists in the 1980s and 1990s thought monetary union would encourage cross-border investment and trade by eliminating the risk premiums associated with the supposedly destabilising devaluations of the past. The net effect would be converging living standards, dampened business cycles, slower inflation, and faster productivity growth for everyone — the benign Germanisation of Europe.

This was a laudable goal, but unfortunately it’s not how things worked out. The policy mistakes that exacerbated the eurozone crisis, while deeply destructive, can’t be blamed. A stimulating conference recently hosted by the Centre for European Reform made it clear to us the euro had already failed to meet the expectations of its architects before the crisis. Sharing currencies was unnecessary for economic convergence, if not actively harmful. Read more

Greece is gimped, and yet the euro rots…

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Politics not fintech will determine a Greek parallel currency’s success

Earlier this week we gave fintech people a brief guide to the Greek crisis in a bid to explain why payments technology is unlikely to be part of any solution there.

On bitcoin specifically: why on earth would Greece want to replace the euro, a currency it already thinks too restrictive, with another which would be even more constraining and give Greeks even less control over monetary affairs!? Read more

Your updated Greek bank… Jog? Stumble? Whimper?

It really is crunch time folks. Or at least, it’s a crunch time. We’re sure another could be arranged. Related question: how many ‘extraordinary meetings’ would it take to make the phrase redundant?

From JPM’s always excellent Flows & Liquidity team…

Purchases of offshore money market funds by Greek citizens, our proxy of Greek bank deposit outflows [the purchases of offshore money market funds by Greek citizens shown in Fig 1], points to a large €6bn deposit outflow this [being, last] week, bringing the cumulative deposit outflow since last December to €44bn.

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Guest post: The Greek standoff is no Prisoner’s dilemma

This guest contribution, from Giles Wilkes, sprung from a fierce internal debate amongst the FT’s leader writing team on Wednesday…


The standoff between the Greeks and their European creditors has often been compared to a Prisoner’s dilemma. This foundational scenario for game theory – famously, the expert discipline of Yanis Varoufakis, the Greek finance minister – concerns two prisoners accused of a crime who are handled separately by the police. Each are given the choice either of ratting on their accomplice, or staying silent. Should just one of the prisoners choose to rat on the other, he will walk free with a reward while his mate languishes in jail. If both hold firm, they each walk free unrewarded, while if they each betray their friend, then both are thrown into jail. Read more

Your brave euro

As SocGen’s Kit Juckes says, the main topic in currency markets may be the resilience of the euro in the face of the ongoing Greek tragedy (ed – no, sorry) comedy (ed- really now, no) thing.

I wouldn’t know. I’ve been on holidays.

But in case that’s true, here’s Nomura’s Jens Nordvig on why it might be holding up. Read more

Of negative rates and reserve managers

Might have to pop this at the top, it’s a chart with lots of negative yield stuff on it after all:

Now, as we have said before… friends don’t let friends extrapolate too wildly from the IMF’s COFER data.  Read more

The end of days, or yield, or whatever

From a hyperbolic Citi, a new normal stat du jour:

The end of the world as we know it is approaching. Very few market participants remember a bond market where the structural trend in yields wasn’t relentlessly lower.

We can continue to quibble about the scope for marginal performance in both rates and credit – and quibble we will over the coming months. But for all intents and purposes any € fixed income investor is now picking up pennies – if not outright paying for the privilege of taking someone else’s credit risk. The 30yr bull-run in fixed income is on its last legs.

One third of €-denominated bonds have negative yields. 82% now yields less than 1%

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On the availability of dollar funding

General collateral rates are known to get volatile as banks scramble for liquidity ahead of the quarter’s close.

But this March 31, GC rates didn’t just get volatile. They went positively paraobolic.

According to Bloomberg Data, the overnight US dollar GC rate more than doubled to 0.45 per cent, a rate not seen in the markets since October 2012. They fell back to 0.2 per cent range on Wednesday, implying there’s no systemic threat to talk about, but the spike does prompt questions over how and why a funding mismatch of this level might have come about. Read more

Eurozone: welcome to your currency board future

Citi’s Chief Economist Willem Buiter spent some time with FT Alphaville explaining why he believes Draghi’s concession on profit and loss sharing among ECB member national central banks turns, in all likelihood, the single monetary unit into nothing more than a glorified currency board.

Quick background: The ECB’s profit-and-loss sharing mechanism became a key negotiating point ahead of European QE. For the Bundesbank, QE was only viable if NCBs assumed most of the responsibility for losses on assets they brought into the consolidated balance sheet. In the end Draghi acquiesced by reducing risk-sharing to only 20 per cent of assets.

A currency board works by pegging liabilities (central bank reserves and currency) to an exchange rate target, rather than a CPI or employment target. The monetary authority managing the board achieves the target by ensuring all commercial entities served by the system can convert the authority’s liabilities into foreign currency at any point. In short, there’s a guaranteed FX convertibility promise at the central bank. Read more

Weak euro, meet the ECB’s inflation forecasts

From JPM’s Raphael Brun-Aguerre

And from the same source (with our emphasis): Read more

There’s no right to parity

Is this nuts?

…the speed of the Euro depreciation is starting to look very fast. We are in the 99th percentile (at least) of 3M, 6M, 9M, and 12M moves since initiation in 1999.

– Nordvig, Nomura

Over the last eight months the USD has appreciated faster on a trade-weighted basis than at any time in the last 40 years and probably over a longer, much longer duration.

– Englander, Citi

Which, again, looks like this: Read more

The ECB’s early adopter problem

You know how Bitcoin miners get a natural advantage in the cryptocurrency pyramid of inequality because of being early adopters that get first dibs on all new currency that’s created?

Turns out the ECB has a similar problem.

Here’s a nice write up of the distributive problems associated with QE-style helicopter drops in the current asset-purchasing framework from Pierre Monnin, a fellow at the Council on Economic Policies (our emphasis):

In practice, targeted money drops, like quantitative easing (QE), do not spread instantaneously throughout the economy. Like a vaccine, money is injected at one place and then disperses more or less quickly to other areas. Stephen Williamson[3] and Olivier Ledoit[4] have closely looked at how a money injection moves through the economy. They both use a model in which different economic groups trade randomly and repeatedly with each other.

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It’s not the euro that’s getting cheaper; it’s the dollar that’s getting more expensive

You may have noticed that a US dollar goes a lot further in much of Europe than it used to. In fact, it goes about 25 per cent further. From our colleagues at FastFT:

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What did the SNB do to EURCHF options markets?

The Swiss National Bank made G10 FX a lot more fun to watch today. One interesting thing is how the options markets responded.

Via Jared Woodard of BGC, here’s a chart comparing the move in one-week implied volatility in the exchange rate between the Swiss franc and the euro — basically, the cost of hedging the risk that the franc appreciates plus the cost of hedging the risk that it depreciates — against the actual move in the EURCHF exchange rate: Read more

Guest post: The euro question

Despite many recent reforms, standstill in euro area output and prices–alongside renewed debates on Grexit–have put fundamental questions about the euro back on the map. Perhaps, argues Peter Doyle, economist and former IMF staffer, that is because the key question about the euro has yet to be posed.

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Europe is leaking

From JPM’s Flows & Liquidity team, this is what ECB QE incontinence looks like:

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Keep beholding the (German) Euroglut

If you don’t you might miss all the capital outflow which, according to Deutsche’s George Saravelos, “not only has depreciatory implications for the euro, but also suggests that the consequences of Euroglut – low global bond yields and a stronger dollar – are here to stay.”

Oh, and blame Germany. Read more

FREE e-book offer for FT Alphaville readers

Numbers are limited, so no more than 6 downloads per registered user please. (Before you click, it’s an 8meg file.)

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Draghi’s true alternatives

Mario Draghi has been very clear about what would push him into the full-blown QE of buying government bonds. He faces some serious opposition from German monetary conservatives even to the less whizzy QE he’s unveiled so far, though — that of buying asset-backed securities.

Full-on QE faces legal difficulties from the ban on financing eurozone governments, as well as deep-seated opposition within Germany and major issues about which government bonds it should buy, and in what proportion. (Italy has the most in issue, so buy mostly Italian debt? Or buy in proportion to shares in the ECB? Or to economic size, meaning the biggest share would be German? Or in proportion to the size of the banking system?).

So it feels like time to explore some alternatives that have been, inexplicably in our view, ignored. Read more

Behold the Euroglut

What ails Europe is not “secular stagnation” or “normalisation”, but rather the much more specific problem of a “Euroglut”.

So, at least, says George Saravelos at Deutsche Bank.

His argument relates to the idea that the global imbalances which were created by Europe’s massive current account surplus are becoming the defining variables which will drive a weaker euro, low long-end yields and exceptionally flat global yield curves, as well as ongoing inflows into “good” EM assets. Read more