ECB to Offer Liquidity with 3-Month Dollar Loans, Forex in Risk Rally Mode

FXTimes   |  September 15 2011 8:02 EDT

The main story behind today’s trading, which included risk on rally in New York trading session, was a move by the ECB to coordinate with other central banks mainly the Fed to offer three month US dollar loans to commercial banks.

The ECB move was done in coordination with the US Federal Reserve, the Bank of England, the Bank of Japan and Swiss national Bank. That idea behind the moves to make sure that companies have liquidity and access to dollars through the end of the year. The move had a positive effect with European bank shares rallying strongly.

From Reuters: European banks had in finding it very hard to obtain dollar funding for periods longer than a few days as US money markets bonds and other traditional dollar lenders became increasingly nervous about the threat of agreed that the fault, which could destabilize markets throughout the region. European bank stocks have lost a third of their value since July.

While this news helped increase “risk on” trades meaning higher-yielding currencies linked to global trade rallied at the expense of traditional safe haven currencies the move by the ECB does not eliminate the threat surrounding the European banking sector. While near-term liquidity crisis may have been alleviated, the longer-term problems stem from the sovereign debt crisis and that remains firmly with us still.

Therefore, today’s events still be taken within the context of the correction to the risk aversion we had seen prior few weeks, and that underlying problems regarding Greece despite the positive developments of late will resume pressuring both bank stocks and the euro as you move through the weeks ahead.

For today, currency markets were in a risk on mode, meaning traders and investors were searching for higher yields in”riskier” currencies. The EUR/USD surged higher but was beaten back at the 1.3925 resistance level. Commodity currencies like the AUD and CAD followed the EUR higher and manged to hold their gains, while the GBP (also a “risk” currency) was stronger during the NY trading session, but receded from its highs.

While we remain cautious of the recent risk rally, we’ll have to see how equities and sentiment develops during the final trading session of the week. The fear of an imminent Greek default may have eased, the problems of weak economic growth in the euro zone and in the US continue (and in the US case was reinforced by today’s data) and will weigh on any risk rallies.

Nick Nasad
Chief Market Analyst
FXTimes

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