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FX Day Trading - 1 December 2011
Cheaper USD liquidity for banks
Six central banks extend swap facilities
But no panacea for the Euroland debt crisis
Earlier in the week this column was scornful of the unions' plan to strike their way out of recession.
In retrospect that was a totally unwarranted calumny. Not only did yesterday's public sector workers' strike cause minimal disruption, it could indeed have given a boost to the economy.
Rather than standing around braziers with mugs of tea, strikers headed for the mall. Shopping centres around the country reported queues to get into the car park and at Bluewater in Kent attendance was 7% higher than usual. It just goes to prove that the law of unintended consequences does not always work for the worst.
The same could be said of an unexpected move by six central banks to make it cheaper for commercial banks to borrow dollars. Every central bank – even the European Central Bank – has been providing liquidity to banks in its own region. It can do so 'til the cows come home because it has the ability to print its own money.
But a significant proportion of interbank lending has traditionally been in US dollars, and US banks are reluctant to lend to European banks. (To be fair, all banks are reluctant to lend to all other banks at the moment.)
Because the ECB, the Bank of England, etc., cannot print dollars a swap facility has been in place whereby the Federal Reserve lends them dollars against the security of what amounts to a euro or sterling deposit. Those dollars are then dished out to European and British banks against some sort of collateral.
The gist of yesterday's announcement was to extend the arrangement for another 14 months and to reduce the interest rate from 1.06% to 0.56%. The Bank of England, the Federal Reserve, the Bank of Japan, the Bank of Canada, the Swiss National Bank and the ECB made simultaneous and almost identical statements on the matter at lunchtime.
The reaction of FX spread betting investors was ecstatic. At last somebody was doing something. The euro and the commodity currencies shot higher while the safe-haven US dollar and yen were abandoned.
Share spread betting prices in Europe and North America went up by more than 4% on the day, followed in the same direction this morning by equity markets in the Far East. A mood of festive cheer pervaded financial markets. The inference seemed to be that the central banks' move must be a component of new and decisive action to quell the Euroland debt crisis.
But is it? Providing cheaper dollars to commercial banks will make their lives less uncomfortable; it will not make them any more eager to lend euros to Italy, Spain or whomever.
There is every chance that this latest breakthrough will turn out to be yet another nine-minute wonder. Useful as the extension to the swaps facility is, it is aimed at the symptoms not the disease.
EU leaders have until their summit meeting next weekend to come up with something investors can believe in. Until then the euro is on parole; yesterday's announcement by the central banks was not a get-out-of-jail-free card.
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'Share Spread Betting Markets Lifted by Coordinated Central Bank Action', Article by Moneycorp, last update: 1-Dec-11
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