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Forex Flash: Bids halts EUR/USD Draghi nosedive – BBH

Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman believes that the nosedive to post a low at 1.3375 yesterday was merely corrective and is anticipating the resumption of the Euro´s up-trend. He highlights that this is the type of pull back, more than 2% of the high, that offers opportunities for short and medium term participants.

He sees that the key factor driving the Euro higher has been the passive tightening of monetary conditions. There is nothing Draghi said that suggest the ECB is going to take action to offset this passive tightening. He suggested that it reflected constructive developments. Many banks borrowed LTRO funds for precautionary reasons and no longer require it. Draghi also explained that monetary policy remains accommodative and funding is available on a full allotment basis, which is to say as much funding as the banks have collateral for will be provided.

Chandler feels that the fact that Draghi discussed the Euro in his introductory remarks and the number of times that the Euro was mentioned in the press conference may suggest greater concern about the exchange rate than he let on. Yet he seemed quite relaxed and noted the Euro on a nominal and real basis was not far from long-term averages. His remark about currencies reflecting fundamentals may be anticipating what the G20 says next week.

He writes, “The fact of the matter is that the different levels of competitiveness within the Euro area means that thee are different pain thresholds for the exchange rate. Among the large countries, France, Italy and Spain are less competitive and therefore the strength of the Euro bites earlier than it may for Germany and the Netherlands.”

Every Friday, he notes that the market's will learn how much European banks will be repaying their LTRO borrowings. It may be coming in drips and drabs, but another large payment, perhaps in the EUR150-200 bln range, may be made when borrowings from the second LTRO can be repaid. Further, he adds that there had been some concern over the appetite for peripheral bonds. The issue is that as bank's return funds to the ECB, it frees up collateral that was pledged for the LTRO funds. The collateral is believed to be largely government bonds. Now that collateral is uncovered, commercial banks, which remain significant buyers of government bonds, may not be looking to extend exposures.

Chandler finishes by commenting, “Italy's weak auction last week played on such fears but the three-tranche Spanish auction this week was relatively smooth. The government raised a little more it anticipated. Yields were higher than prior auctions, but there has been a backing up in Spanish yields since before the funding scandal emerged. It looks like investors saw the increase in yields as an attractive concession.”

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