Posts by "macrosam"

EONIA is ticking down again, now five days in a row. However, this is not coming as a result of an increase in excess liquidity as both the most recent rolls of the 1 week and 3 month (when combined with the 1 month also expiring on 11 Aug) show that excess liquidity is progressively being drained. I believe the downtick in EONIA is now reflecting a decrease in demand for EUR likely to be driven by the following:

1) ECB essentially indicating that the full allocation repos will be extended into 2011, taking off the table concerns of end of year liquidity concerns, and

2) The Eurozone will have comparable USD funding needs for the remainder of 2010 as it did in the first half of 2010. I don't believe this USD will be swapped back into EUR, or at least not the majority of it, reflecting a need to fund USD denominated liabilities.

I am waiting to short EUR/USD around the 1.3250 - 1.3300 level, anticipating that may present itself on Thursday or Friday of this week. First target is at the 1.2600 level.

Note that even though 2yr UST yields are as low as 57 bps, the yields on 3s and 5s have come in considerably as well, the curve is steepening between 5s and 10s and 30s. 3s and 5s may be seen by investors as the new 2 yr as the move out the curve for yield in front end tenors continues.

An excess 5.6bn EUR in liquidity was the result of yesterday's 1 week full allocation repo (more was taken down by banks than rolled off from the prior week). EONIA may have seen its near term ceiling.

This helps explain the success of the recent Euro zone bond issues. The widening in the Euro zone current account deficit likely matched a widening in China's current account surplus (cause and effect) and China consequently had to recycle the surplus abroad.

Euro zone current account deficit widens in May

19 Jul, 2010 @ 04:06 am BST | written by ecPulse.com

Euro zone current account seasonally adjusted showed a winded deficit in May to 5.8 billion euros compared with the prior deficit of 5.1 billion euros which was revised to 5.6 billion euros.

The non-seasonally-adjusted reading also showed a widened deficit to 16.7 billion euros from 6.9 billion euros, revised downwards to 7.5 billion euros.

This mornings WSJ article probably aided the bid in EUR from the lows:

WSJ: Former PBOC Adviser: China Should Reduce Dollar Assets In FX Reserves
DOW JONES NEWSWIRES

China should reduce the amount of U.S. dollar-denominated assets in its
foreign exchange reserves in favor of those denominated in other currencies or
other types of assets, former People's Bank of China adviser Yu Yongding wrote
in an article published in the state-run China Securities Journal on Monday.

China doesn't disclose detailed information about the composition of its
foreign-exchange reserves--at nearly $2.5 trillion, the world's biggest--but
economists have estimated 65%-70% of the reserves are invested in U.S. dollar-
denominated assets, mostly U.S. Treasurys.

...