ECB Preview and FXE Trade Update

by CC January 11, 2012 11:26 am • Commentary

Mario Draghi, and the governing body of the European Central Bank meet tomorrow. Expectations are low for much news as interest rates are assumed to stand still even as many outsiders desperately urge them to do more. There will be a question and answer session following, news could emerge from that. Here’s some previews:


The European Central Bank needs to do more to prevent the collapse of the euro, Fitch Ratings said Wednesday, one day after banks’ overnight deposits with the bank hit yet another all-time high.

“The ECB, clearly, does need to be more actively engaged,” said David Riley, head of global sovereign ratings at Fitch, speaking at a conference in Frankfurt. The ECB “has plenty of scope to expand its balance sheet without unleashing inflation in the euro zone,” Mr. Riley said.

Fitch is conducting roadshows across Europe this week to discuss its 2012 outlook for the region. The comments in Frankfurt followed a speech Tuesday in London, where Mr. Riley said the lack of an agreement from European leaders on how to implement a “credible firewall” to prevent contagion puts the currency bloc at risk of dissolving. However, as Fitch does not regard the current euro-zone crisis as a monetary crisis, “it is unreasonable to expect the ECB to save the euro on its own,” Mr. Riley added on Wednesday.

Euro-zone banks parked €485.898 billion ($620.88 billion) in the ECB’s deposit facility Tuesday, up from the €481.935 billion recorded Monday, ECB data showed. The overnight deposit level has been elevated since August 2011, with banks using the ECB to hoard excess cash instead of lending it to other banks. Banks are increasingly reluctant to lend to one another due to concern about their exposure to risky euro-zone sovereign debt.

Use of the deposit facility has reached ever higher levels since the ECB in December flooded the market with €489.1 billion liquidity in its longer-term refinancing operation. A second such operation is planned for February.


The committee is expected to keep interest rates on hold at the historic low of 1 percent, and hold back on further action, despite growing calls for the bank to resort to quantitative easing – buying government bonds in primary markets, like the Bank of England and the Federal Reserve.

“(Mario) Draghi (the head of the ECB) can’t sit there and be idle at a time when we’re getting very, very bad news for the euro zone,” Carl Weinberg, Chief Economist, High Frequency Economics, told CNBC. “The economy could use an interest rate cut.”

He added that he believes Draghi is “not quite ready” for quantitative easing yet, but that February could herald such an operation.

There was better-than-expected demand for the ECB’s offer of unlimited three-year loans, known as long-term refinancing operations (LTROs), which were launched in December. However, evidence suggests that many of the banks which snapped up the LTROs are sitting on their new funds or depositing them back into the ECB rather than risk them elsewhere.

Commercial banks’ overnight deposits at the European Central Bank hit a fresh high of 482 billion euros ($616.8 billion) on Tuesday as banks continued to keep their funds with the central bank rather than lend them or buy up sovereign bonds.

And while leaders are wrangling over the best way to solve the debt crisis, worries that the euro region will slip into recession this year continue.

“There remains a strong case for the ECB to embark on large scale asset purchases similar to the quantitative easing programs undertaken by the Federal Reserve and the Bank of England,” analysts at Credit Suisse wrote in a note.

They believe that the LTROs have a “reasonable chance” of success.

Monetary Conditions Loosening

The Euro Overnight Index Average (EONIA) interest rate – the rate at which banks lend to each other overnight – has fallen to similar levels to those seen in the first half of 2010, indicating that monetary conditions are loosening.

Auctions of Italian and Spanish bonds Thursday morning should indicate investor sentiment towards these countries, the euro zone’s third and fourth largest economies, which have struggled in recent months as yields rose on their bonds.

In the past, the ECB has bought up some of their bonds to help bring yields under control.

We have a position on in FXE that we may take off going into the meeting. Paid 1.23, it’s now bid 3.25. Stay tuned.