Currency Wars & ECB's Shrinking Balance Sheet

by Ashraf Laidi
Jan 25, 2013 18:17 | 22 Comments

Are the euro's gains just starting as the ECB balance sheet shrinks further from LTRO repayment?

278 European banks have repaid €137 bn in the first LTRO operation, which raised € 489 bn in December 2012. LTRO-2 from February 2012 now receive a repayment of about €250 bn.On today's announcement, Spanish 10-year yield saw its biggest decline of all Eurozone bonds, losing 15 bps versus a mere 3 bps for its Italian counterpart.  This is partly explained by the fact that Spanish banks were the biggest borrowers in LTRO-1 lending, accounting for 41% of total take-up, compared to 25% from Italian banks.

Repayments of LTRO-2 will be announced on February 22 and will take place on Feb 27. As European banks repay about € 400 bn, the immediate analysis to make is to expect a reduction in liquidity and a run-up Eurozone overnight interest rates—something the ECB has worked hard to avoid.  But EU banks will continue to seek funding from the ECB's shorter-term LTROs, keeping their needs sufficiently met.

Click To Enlarge
Currency Wars & ECB's Shrinking Balance Sheet - Balance Sheets Jan 25 2013 (Chart 1)

Regardless of whether LTRO repayments will keep €200 bn or €500 bn in excess liquidity in the Eurozone monetary system, the ECB is the only major central bank not to have issued a fresh dosage of asset purchases as is the case of the Fed, BoJ and inevitably the BoE (following its triple quarterly growth dip). The above charts show the ECB balance sheet has in fact shrunk by 5% over the last 6 months compared to increases of 5-15% for the other big three.

The ECB's refraining from currency wars may not be the only reason to the euro's sharp rebound. 32-month highs in Germany's business surveys and solid auctions by most periphery Eurozone nations as of late can be categorized among “stabilizing fundamentals” for the Eurozone. The road to $1.37 in EURUSD remains intact as suggested in our Dec 4 note “1.35 Euro Target Revised up”. .$1.40 is no longer deemed an aggressive forecast, and is considered baseline objective for early Q2 2013.

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Comments (Showing latest 10 of 22) View All Comments
djellal
LAUSANNE, Switzerland
Posts: 531
7 years ago
Apr 10, 2013 15:12
In reply to Qingyu's post
TechCrunch notes, Coinsetter - a NY-based startup looking to launch a trading platform for Bitcoin has raised $500,000 in seed capital. The platform will allow leverage (via margin) and the ability to short the market.
Qingyu
manchester, UK
Posts: 1763
7 years ago
Apr 10, 2013 14:44
In reply to djellal's post
well, bought some computer produce bitcoin seems have more profits than digging gold.

but my concern is how can we short it.
djellal
LAUSANNE, Switzerland
Posts: 531
7 years ago
Apr 10, 2013 14:23
is that the bitcoin would not rather a weapon in the Chinese currency war to break the hegemony of the U.S. dollar ???

I don't think that the Bitcoin come from japannnnn
Qingyu
manchester, UK
Posts: 1763
7 years ago
Feb 8, 2013 17:08
In reply to Saka's post
ah, u r meant in long term perspective.
cat0nip
Frankfurt, Germany
Posts: 1632
7 years ago
Feb 8, 2013 17:06
Very few people none of them chartists have understood the difference of Fed QE and ECB QE.
The Fed may indeed stop QE4 before a particular level of unemployment is actually achieved, the ECB can never stop QE.
The very thin and even alleged LTRO backflow adds to serious doubts in EUR.
Saka
China
Posts: 29
7 years ago
Feb 8, 2013 15:00
In reply to Qingyu's post
it means there will be a big bullish trend of USD. As what Andy Xie said, because US will recovery than other countries.
Saka
China
Posts: 29
7 years ago
Feb 8, 2013 14:54
In reply to Ashraf Laidi's post
Keynes? LoL
DaveO
N.Cornwall, UK
Posts: 5733
7 years ago
Feb 8, 2013 11:26
In reply to cat0nip's post
It makes sense on a macro perspective, deflationary/deleveraging environment before inflation returns, just a question of timing. And our leaders are masters at deferring the inevitable.
cat0nip
Frankfurt, Germany
Posts: 1632
7 years ago
Feb 8, 2013 11:12
In reply to Saka's post
I have a long term short in aussie I do even expect return to parity
DaveO
N.Cornwall, UK
Posts: 5733
7 years ago
Feb 8, 2013 10:45
In reply to Ashraf Laidi's post
Yeah Ashraf, you sounding like my wife now :-) whenever I get wound up about economics etc she quotes her "we are all ants" piece, " we are all dead quite soon" (medical background)