ECB's September Banking Sector Stability Report Opens Fresh Wounds, Sends Euro Lower
The recent decline in the futures is attributed to a 40 pip move lower in the EURUSD (yes, it is pathetic that the entire market once again is merely a tick for tick xerox of the FX pair, which in turn is driven almost exclusively by excess liquidity expectations/QE on either side of the Atlantic) which is attributed to the just released September issue of the EU Banking Sector Stability report. In it, the central bank opens up fresh wounds, by reminding just how fragile the European banking system is. Which should be a stark reminder for all who believe the euro will go straight up without interruption, that Europe is currently panicking and will soon gladly retract everything said recently in the Stress Farce about how stable the banking system is, if it means a drop in the euro and a resumption in exports.
From the report:
Conditions in both short and long-term funding markets were still far from normal in August 2010, and funding challenges for some banks remained substantial. Looking ahead, one area of concern is the risk of bank bond issuance being crowded out as a result of the significant increase in financing needs of several EU governments in the period ahead. In addition, banks may also face the prospect of higher funding costs owing to the need to term out their funding and because of increasing competitive pressures in markets for retail deposits. Moreover, the continued reliance of some banks on central bank refinancing facilities remains a source of concern.
As we are now back in a regime where the market correlates almost perfectly with a weak dollar, and thus a strong EUR, regional liquidity headlines such as this will continue to determine every move in the broader market.