FX Briefing - ECB embarks on exit from unconventional measures
FX Briefing 4
on Dubai debts abates
government opposed to yen appreciation
Council planning to move out of crisis mode
firm against the dollar, but no major breakout so far
ECB embarks on exit from
The dollar, which had firmed last week after the news
of Dubai Worldâs debt problems, lost ground again during the course of the week. Most market
participants regard Dubai Worldâs request to restructure its debts as a serious
matter, but with only a limited impact; there are latent fears, however, that
further âdebt problem casesâ could come to light eventually. On the whole,
uncertainty has abated.
The ECB governing council meeting was the second, and
perhaps more important, reason why the dollar was weaker. Comments made by ECB president
Jean-Claude Trichet and other council members in the run-up to the meeting had signaled
clearly that the ECB would embark on its exit from unconventional measures â
contrary to the Fed, which is emphasizing credit supply problems as well as
under-utilisation of production capacity, and has so far shown little
inclination to reduce quantitative easing.
Correspondingly, in the run-up to the meeting, EUR-USD
gradually edged up to last weekâs levels again. On Thursday morning, the
European single currency rose over 1.51. However, even though the ECB has
announced a relatively ambitious plan to unwind emergency measures, the euro
has been unable to breach 1.5145. Given the unexpectedly good labour market
figures, markets are more likely to speculate on the Fed starting to tighten
USD-JPY is moving in its own stratosphere. Last week,
after some contradictory comments on currency intervention from the Ministry of
Finance, the dollar had dropped below 85 against the yen, a 14-year low. This
week, the government seem to be unanimous about not wanting to risk any further
appreciation of the yen. Prime Minister Yukio Hatoyama himself commented that
the current strength of the yen was not acceptable. Furthermore, the Bank of
Japan decided at an extraordinary meeting to extend its quantitative easing
measures: it is launching an additional 10 trillion yen facility to offer banks
loans against a wide range of collateral. Subsequently, USD-JPY recovered to
ECB embarks on âquantitative
The market had been expecting the ECB to discontinue its
12-month tender next year, and had also considered it possible that the rate for the December
12-month tender could be calculated on average refinancing costs during the
maturity period. But the ECB has gone even further: it has decided that the last 6-month tender will be carried out
in March; furthermore, after the third maintenance period ends in April, only
weekly and monthly tenders, if any, are likely to be offered using a full
allotment fixed rate tender procedure. This suggests that, as from Q2, the 3- month
tender could be offered at a variable rate again.
The measures the ECB is embarking on are likelyto ensure that liquidity, which at the moment
is mostly provided on a long-term basis, will be available
on a short-term basis instead. At latest, this will be the case at the
beginning of July 2010, when the âŹ442bn one-year tender matures. However, the
ECB could tighten monetary policy again in the second quarter, if it so wished,
as excess liquidity has already been reduced significantly, and now âonlyâ
about âŹ60bn are being placed in the deposit facility on average.
The ECB has asserted that the latest measures are not
linked to any interest rate policy intentions. This is likely to be the case for
the time being. However, it is also clear that very short-dated money market
rates will rise towards the refinancing rate again when money market management
is no longer in crisis mode and excess liquidity is drained from the market.
Moreover, it only makes sense to offer the forthcoming one year tender at a
fixed rate if one is at least toying with the idea of raising the refi rate
within the relevant time-frame.
Stephan Rieke +49 69 718-4114
Grabbe / Klaus NĂ€fken
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