G3 Recap 8-26-11

Main Items:

  • Bernanke didn’t indicate any additional easing measures at Jackson Hole. “The Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September”
  • US 2Q GDP was revised down to 1.0% vs 1.1% exp and 1.3% prev
  • U Michigan Confidence


  • Greece has been forced to activate the ELA for its banks because they are running short of collateral that is acceptable to the ECB. Irish banks are already using the Irish Central Bank’s ELA. Here’s a recap of Ireland’s use of the ELA.
  • EU M3 growth declined to 2.0% YoY in July vs 2.2% exp and 2.1% prev
  • UK 2Q GDP was unchanged at 0.2% QoQ as exp
  • Swiss KOF dropped to 1.61 in Aug vs 1.8 exp and 1.98 prev.
  • Japan’s PM Kan confirmed that he will resign early next week. He is the sixth PM to step down in the last five years.


  • The ECB’s reaction to Greece’s tapping of the ELA should be closely watched. Assuming the reaction is the same as the reaction to Ireland’s use of the ELA, the ECB is essentially sanctioning money creation and loans against potentially questionable collateral. If this is the case, no EU banks will go under.
  • EURUSD has broken down versus its usual short term drivers, and various sources have noted this disconnect. The chart from Citi below highlights this:

    People still seem puzzled by the break, but there is probably a simple answer. China is buying EU debt. Look at the chart below. Note how EURUSD broke away from the interest rate spread in early August… right when USDCNY dropped. This view is also supported by flow data.

    Looking ahead, this source of support looks unlikely to last. Short EURUSD has been a frustrating trade in August, but weak data and a dovish ECB could be a catalyst for a move lower.


3 thoughts on “G3 Recap 8-26-11

  1. there are lots of barriers from range trades above 1.4525 in the EUR … depending on how they were hedged, worth being cautious if near the liquidity holes / upside surprise CHF moves …

  2. I might be wrong – the break appears to be because the US 2yr rate can’t go any lower. If the 5yr rate differential is used, the relationship remains intact.

    Thanks qeqe. Looks like they got triggered this morning. We’ll see how it plays out.

    Chance – in my opinion, the US treasury market has already priced in a decent probability of QE3 / operation twist. The relationship between 5yr rate spreads and EURUSD remained strong throught Q4 of 2010.

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