piagi corporate foreign exchange Blog

What will effect the forex markets and weekend review

 Email Article  

Tweet  

  

  

  

Developments in the Middle East continue to be the most prescient news stories over the weekend. According to reports, protests in Libya have turned increasingly violent, with Human Rights Watch stating that at least 104 people have died since the unrest escalated on Wednesday. The situation remains tense elsewhere in the Middle East, with civil unrest continuing in Bahrain, Yemen, Djibouti and Algeria. After Egypt confirmed Iranian warships would pass through the Suez Canal, Iran’s state TV claims the passage has already been completed. Egypt has denied this is the case. The ships are due to pass late Sunday / early Monday morning. Maybe worth considering developments in New York, with the US the lone voice (and veto) against a resolution condemning Israeli settlement building in Palestinian territories.

Away from the Middle East, a “stepping stone” deal reached at a G20 meeting in Paris on economic imbalance indicators. According to the FT, the indicators will include: “public sector debt and deficits and private savings rates, as well as external imbalances “composed of the trade balance and net investment income flows and transfers””. Mentioning of current account levels and exchange rates have been watered down after Chinese opposition.

The recent rise in Portuguese bond yields has got the market back onto the bailout theme in the last 10 days. Couldn’t find any explicit quotes on Portugal over the weekend, but an interesting feature on the BBC’s Newsnight on the subject. Nothing original, but its feature in mainstream news is a fairly interesting development (http://www.bbc.co.uk/news/business-12512815). Confirmation from European sources that Irish Banks behind spike in marginal lending facilities at the ECB. Latest election polls put Fine Gael within 1% of governing majority in Ireland.

Lastly, more hawkish tones coming from the ECB. At a press conference in the aftermath of the G20 meeting, Trichet: “In our own judgment there was a balance between risks of price stability in the medium run but we did not exclude that the future of this balance is unbalanced on the upside.”

Middle East, Protests

• Protests in the Middle East continue to spread. Human Rights Watch are cited by the BBC as saying that 104 people have died in Libya since the protests started on Wednesday. These estimates are seen as “conservative”. The Telegraph is reporting that 140 have died.
• After Friday’s deaths, Bahraini protestors are considering the government’s offer of talks. Crown Prince Salman bin Hamad Al Khalifa has been given the responsibility of leading the talks: Calm is required so all parties can put forward their views and issues in a responsible and productive way...[the country is entering a phase] in which we will discuss all our issues sincerely and honestly.”
• Protests are also said to be occurring in Yemen and Djibouti. In Yemen, gunfire was reported in the capital, with 2000 protestors demanding the ousting of a President who has ruled the country for 32 years. In Djibouti, three opposition leaders were released on Saturday after protests turned violent.
• In Iran, Western media continues to report on growing opposition. The Guardian is reporting that Mousavi’s official website is encouraging the protests: “In response to the brutal suppression and killing of the supporters of the Green Movement, we will go out in streets in major squares [of Tehran and other big cities] on Sunday which will mark the seventh day after the death of our martyrs.”
• “Libya: Death toll from escalating unrest ‘tops 100’”, BBC, http://www.bbc.co.uk/news/world-africa-12517327.
• “Libya protests: 140 ‘massacred’ as Gaddafi sends in snipers to crush dissent”, Telegraph, http://www.telegraph.co.uk/news/worldnews/africaandindianocean/libya/8335934/Libya-protests-140-massacred-as-Gaddafi-sends-in-snipers-to-crush-dissent.html.
• “Bahrain Protesters Weigh Talks as Libyans Warn of ‘Bloodbaths’, Bloomberg, http://www.businessweek.com/news/2011-02-20/bahrain-protesters-weighs-talks-as-libyans-warn-of-bloodbath-.html.
• “Iranian opposition calls for fresh protests over pair killed during rally”, Guardian, http://www.guardian.co.uk/world/2011/feb/19/iranian-opposition-fresh-protests-pair-killed.

Middle East, Suez Canal

• Egyptian officials have denied Iranian State TV claims that two Iranian vessels have already passed through the Suez Canal. According to reports, the ships were due at the Southern entrance in the Gulf of Suez later on Sunday. They would then pass then through the Canal in the early hours of Monday morning.
• Nethanyahu commented on Sunday that "I think that today, we can see what an unstable region we live in, a region in which Iran tries to exploit the situation that has been created in order to expand its influence by passing warships through the Suez Canal,"
• “Officials Deny Iran Claims of Ships in Suez”, Sky News, http://news.sky.com/skynews/Home/World-News/Iranian-Naval-Ships-To-Sail-Through-Suez-Canal-For-The-First-Time-Since-1979/Article/201008315937114?lpos=World_News_Top_Stories_Header_4&lid=ARTICLE_15937114_Iranian_Naval_Ships_To_Sail_Through_Suez_Canal_For_The_First_Time_Since_1979.
• “Israel views Iran ships crossing Suez with utmost gravity”, Jerusalem Post, http://www.jpost.com/MiddleEast/Article.aspx?id=209001.

Middle East, US Vote in UN

• In the general context of events in the Middle East, quite a significant move Friday night from the US. The Obama Administration used its first veto in the UN to defeat an Arab-led resolution condemning Israeli settlements in Palestinian territories. Out of 15 members voting, the US were the lone voice against the resolution.
• “US vetoes UN condemnation of Israeli settlements”, Guardian, http://www.guardian.co.uk/world/2011/feb/19/us-veto-israel-settlement.

G20

• G20 leaders reach a compromise deal meant to be seen as a first step towards solving economic imbalances. The deal is said to come against strong Chinese objections.
• French Finance Minister Christine Lagarde said that the measures included the domestic policies of all the G20 members, including public sector debt and deficits and private savings rates, as well as external imbalances “composed of the trade balance and net investment income flows and transfers”.
• The FT reports that non use of “current account” imbalances and not singling out exchange rates as a specific indicator were taken to assuage Chinese opposition.
• On the subject of exchange rate normalisation, Geithner: “there is a broad consensus that not just Europe, Japan and the US, but also the large emerging economies need to allow their exchange rates to adjust in response to market forces.”
• “G20 strikes compromise on global imbalances”, FT, http://www.ft.com/cms/s/0/1a12713e-3c56-11e0-b073-00144feabdc0.html#axzz1EUdlAUXJ.

• Hawkish comments from Trichet after the G20 summit: ““In our own judgment there was a balance between risks of price stability in the medium run but we did not exclude that the future of this balance is unbalanced on the upside.”
• “ECB Doesn’t Exclude Possibility of Euro-Zone Inflation Risk, Trichet Says”, Bloomberg, http://www.bloomberg.com/news/2011-02-19/ecb-doesn-t-exclude-possibility-of-euro-zone-inflation-risk-trichet-says.html.

Ireland, ECB Lending

• “People familiar with the transactions” confirm that troubled Irish lenders were behind the spike in the take-up of the overnight borrowing facilities.
• The funds were required “to facilitate” the sale of deposits by Anglo Irish and Irish Nationwide under their restructuring plan.
• This is in line with what has been speculated since the jump in the MLF.
• “Ireland behind the €16bn spike in ECB lending”, FT, http://www.ft.com/cms/s/0/932501aa-3c41-11e0-b073-00144feabdc0.html#axzz1EUdlAUXJ.

Irish Election

• Campaigning ahead of February 25th General Election reaches its last weekend. 
• Latest Sunday Business Post, suggests a majority government is within Fine Gael’s reach. The poll has Fine Gael on 39%. 40% is generally required to form a majority government.
• Last weekend, a Fine Gael source “spooked” markets when admitting that they may put bond haircuts back on the table when renegotiating the Irish bailout.
• “Campaigns enter endgame”, Irish Times, http://www.irishtimes.com/newspaper/breaking/2011/0220/breaking1.html.

Strauss-Kahn, EU Summit

• Generally sounding positive in a Bloomberg TV interview, but IMF’s Strauss-Kahn warns that the EU must convince at next month’s summit: “markets aren’t everything, but markets are important. You have to do something that will be seen, not only markets, to work”.
• “Strauss-Kahn Says that EU must convince investors on Debt Crisis Before Summits”, Bloomberg, http://www.bloomberg.com/news/2011-02-20/strauss-kahn-says-eu-must-convince-investors-as-summits-loom.html 

Piagi Discusses the impact of ELA on autonomous factors and EONIA

 Email Article  

Tweet  

  

  

  

Over the past few days and weeks, there has been some confirmation of this. It indeed appears that a number of Irish banks have issued about EUR14bn of short dated FRN government guaranteed bonds on January 25 and 26 (first settlement date). This was probably used to reduce the ELA amount on the same days, as was reflected in the Eurosystem financial statement for the week ending January 28, released on Tuesday February 1 (the 'Other assets' item declined an unusually large EUR13bn). This part of the ELA was probably rolled by the Irish banks themselves or by some banks having bought the government guaranteed FRNs, into either the 3m LTRO that occured on January 26 (settlement on January 27), in which the volume increased by a large EUR28bn or into the MRO settling on February 2. On January 27, net autonomous factors jumped unexpectedly by about EUR12bn (the ECB own forecast for the autonomous factors did not anticipate this move, and hence had an unusually big forecast error). Partly as a result of this unexpectedly tighter liquidity conditions (the surplus dipped to just EUR7bn on January 26), and the low banks reserves frontloading, EONIA pushed higher around these dates, printing at 1.17% on January 26 and settling above 1% until the next MRO settled on February 2.

We suspect the decline in ELA was done on January 26 because the Central Bank of Ireland is typically using the last Friday of the month (in this case January 28) as a reference for the publication of its balance sheet. Hence, at the next publication of the balance sheet (probably this Friday), we should observe, other things being equal, a drop in the amount of 'Other assets', and possibly an increase in OMO lending. From a presentational point of view, this is better for Ireland and the ECB. It is also more advantageous for the Irish banks, since the cost of the ELA is much higher than the cost of the ECB OMOs (1% currently), the collateral value of the paper is much higher as well (0.5% rather than probably 30-40% haircuts), and potentially, this paper can be sold in the open market.

As we highlighted in our report, it would thus be useful if, in future, any such big change in ELA is flagged to the market, or at the very least done at a time when the impact on market liquidity is more predictable, or can be reflected in the ECB forecast for autonomous factors, or lastly, can be rolled immediately into an ECB OMO.