Recap 11-30-11

Main Items:

  • Fed, ECB, BoE, BoJ, BoC and SNB lowered the cost of swap lines by 50bps starting 12/5. In addition, the ECB has cut the excess margin it was charging on these trades from 20% to 12%.
  • China cut RRR by 50bps. No cut was expected
  • ADP printed 206k for Nov vs 130k exp and 110k prev
  • Chicago PMI improved to 62.6 in Nov vs 58.5 exp and 58.4 prev


  • Bank runs in Greece: ~7% of deposits left Greek banks in Sept and Oct – BBG
  • EZ CPI Estimate for Nov came in at 3% as exp
  • EZ UE increased to 10.3% in Oct vs 10.2% exp and prev
  • German UE declined to 6.9% in Nov vs 7% exp and prev
  • Italian CPI declined to 3.7% in Nov vs 3.8% exp and prev


This swap line news is basically an easing action for non US banks with USD liabilities. The impact of this is only marginally positive. A 50bps ease for a hypothetical EU bank levered 20x with 20% of its assets funded in USD means higher profits of 50bps * 20 * 20% = 2% after 1 year. Also, the fact that the EURUSD basis didn’t move much (-26bps to 131bps) suggests that most banks think the stigma of using the swap lines costs more than the savings in funding. In other words, this doesn’t appear to do much other than help confidence a bit. In a balance sheet recession, lower funding costs are insufficient to offset deleveraging effects, as Japan can attest. Today is month end, and hence we’ve likely seen the majority of month end flows. Today’s jump puts the S&P well into short term overbought territory and is a nice setup for a short.

Also, note that with this intervention, Libor settings will be less reflective of tensions in the USD funding market. EU banks’ CDS and share prices will once again take center stage. Note that the rate to access the Fed Discount window is 75bps, higher than the 61bps or so for USD funding via the swap lines. As a result, the Fed may cut the Discount Window rate by 13 or 25bps in the near future, but it doesn’t really matter what they so, as the discount window is basically not used right now.


5 thoughts on “Recap 11-30-11

  1. Cheapening of usd funding should help those who are not deleveraging but were held hostage to funding stresses…ie asia. Also wondering will we see risk trade positive along with a strong usd?

    1. It certainly helps, but the # of asian banks and the amt of assets that is fund in USD relative to the region’s GDP is not large. In any case, given lower leverage, higher inflation and real rates in Asia, a 50bp cut doesn’t help a lot, IMO.

      I don’t think we’ll see an extended period of strong USD and risk due to the still sizable US current acct deficit. The USD is used by the US to purchase goods while it’s used by foreigners for funding. That’s of course somewhat oversimplified, but is the main catalyst behind the correlation of USD and risk. In a normal environment, USD declines, but in a stress environment foreigners delever. That suggests that historical correlations will continue until the US current acct shrinks.

      Note that I’m assuming you’re speaking of the trade weighted USD, where the EUR is only ~15%. EURUSD is a separate matter. I actually think the downside for EUR is limited, although the floor could be farther below. Even if the ECB prints to buy sov. debt, it won’t be inflationary for the same reasons the Fed’s QE wasn’t inflationary. So beyond a short term move I think a containment of the EU crisis will be positive EURUSD.

  2. Agree on EURUSD. It seems to stay range bound in a 1.30 – 1.40 band and interesting to note that it
    does not seem to break the 1.35 today, after all the CB action yday.
    Note copper made a good run yday ( up nearly $400 ) but retreating today and doesn’t show appetite to go thru 8000 in a hurry. China’s manufacturing contraction of course being bearish base metals
    Crude oil showing signs it has very much decoupled from the EURUSD story and now takes in the price a good chunk of political risk as well even after Iraq’s State Oil Company stated its monthly oil exports went to 2.135mio bbls in Nov. ( Oct was at 2.088mio bbls).

    GlobalMT: time to refresh the copper to equity graph and see how that behaved with the 3-week lag?

  3. Forgot to ask: you reckon a ECB rate cut is priced in the EURUSD now at 1.34’sh or will such rate cut soon ( ie b4 year end) take the Euro down to 1.30’sh ?

  4. HI PPK –
    Sure – I’ll put the chart up.
    Re: whether an ECB cut is priced in, I think it is, but it may not matter since the EU funding stress is driving the price action. EUR OIS swaps are pricing in 50bp rates over the next 3 months, and BBG consensus is a 25bp cut next Thursday.

Comments are closed.