EUR Shortage Follows Hot On The Heels Of Pervasive USD Lack

Tyler Durden's picture

Earlier, we pointed out that Euribor is surging, despite continuing verbal assault by European bureaucrats that all is well, indicating that the European overnight funding market is structurally broken even as the ECB has become lender of first, last and every resort. The problem, however, is that when it comes to currency liability mismatches, nobody, not even all the central banks in the world, have enough capital to satisfy demand. Which is what seems to be happening with the EUR right now, as the EURUSD surges each day by an unprecedented 100 pips (will someone please advise when in history has the pair been ever so volatile?). Nic Lenoir explains:

We argued at length yesterday the importance of funding and liquidity as the main driver (especially in this environment) of asset prices. Like many I have partly attributed the EURUSD strength in the recent equity weakness to a partial shift from funding difficulties in USD driving the move lower in risk to the recognition of a generally weaker than thought rebound in the US economy (and as a result world economy as world demand is still very much relying on US demand). But factoring in what we discussed about USD funding yesterday and drawing a parallel with what is going on in Euribor now, we see that there is much more than a shift in perception of the US economy versus the European economy. In fact I propose that economic strength has nothing to do with this move.

The Euribor setting has been creeping up, just like the USD 3M Libor 3 months ago. FX forwards indicate that the funding situation in Europe is getting tighter. Obviously LTOR matured at the end of June, and so more difficult funding conditions do make complete sense. Then we look at EURUSD and all of sudden it's a lot easier to understand why it has been rising vertically. When EURUSD sold off (and I am a long term EURUSD bear like few are) it surprised even the most bearish investors by the pace of the move. Well similarly here, the rebound and breakout through the 1.27 resistance has shocked everybody as the move is relentless. Yesterday was key, because as we pointed out yesterday asset classes decorrelated, or at least abandoned their traditional correlations, with DXY trading weak in tandem with weak equities. But AUDUSD was lower on the day, and USDCAD was higher. It is the EUR that was strong more than the USD being weak, and perceived weakness in USD was misguided as crosses such as AUDJPY and USDCAD pointed to risk aversion. But of course: it's a Euro funding squeeze. This should not be interpreted as a traditional EURUSD rally in tandem with equity strength. In fact this currency move is a sign of distress in the system and a reminder that any withdrawal of liquidity triggers a squeeze, in the US like in Europe, because the interbank cash market is still inexistant and if the central banks abandon their role of individual lender to each entity there is no cash circulation to make up for it. Velocity = 0, and one can see it in BAC's earnings this morning indicating that loan balances contracted 2%.

From there Gold which we drew attention to yesterday has indeed triggered its bear flag and I feel that from a technical standpoint the correction could be a lot greater than people expect, especially because long Gold in EUR is a very crowded traded and a EUR shortage will squeeze out everybody. So it feels that in the end commodities and bonds did point the way forward, and equities could re-correlate to the pack by selling off here. I stand by my sell recommendation from Tuesday (flat for now but hopfully that will change quickly).

Good luck trading,


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russki standart's picture

Agreed, EUO may be a good buy (anything short the Euro is worth considering) but I think Gold will be the ultimate winner, along with many other hard assets. Whilst I am a deflationist in the short term (>180 days), inflation as a monetary phenomenon will ultimately assert itself as governments go QE into infinity.

egdeh orez's picture

OK.  Now I'm confused.  Just earlier today, we had an article on ZH which stated that "liquidity is flying towards new highs" (

Now, all of the sudden, we have an article saying that we have a EUR shortage and "FX forwards indicate that the funding situation in Europe is getting tighter."

What's the real deal here?


russki standart's picture

Shortage of Euros?? What a joke! What we may be seeing we is massive deflation setting in due to the banks refusing to lend to each other, and to other entities. The Euro is still crap, and will be printed into infinity.

CPL's picture

You are looking at the wrong canaries in the coal mine.


You want to know the exact point of market collapses, map the Canadian dollar against market falls.  It's uncanny how the Can/USD pair matches .98/1.00, then about three seconds later the shit hits the fan.  Other than resources being cost beyond the range of people and eating bottom lines alive.  I have yet to figure the true reasoning behind it.


I would be interested in hearing an theories on it.


-1Delta's picture




Missing_Link's picture

How many sample points do you have for this phenomenon?  Is it a reliable or is it something that's happened 3 times so maybe that's an indicator?

Orly's picture

I have a theory.  Call it a conspiracy theory...

Back in the day, the Great British Pound, which is basically the foundation of currencies world-wide (Rothschild's Bank...), collapsed after Lehman.  Irish banks, Scandinavian banks and, through vast popular real estate holdings amongst the people of the UK, Spanish banks were all infected with a form of secondary paralysis when the Cable locked up.

It was Bernanke's "duty" to recapitalise the UK through a half-trillion dollar FX swap (see Alan Grayson's discussion with Bernanke at a Congressional hearing...).  In doing so, he unfroze credit markets in all of Europe, which allowed time for the first round of QE to take effect.  It was done, in good faith, I believe, to curtail a massive ongoing sell-off of anything denominated in USD.  People were flocking to safety as fast as they could.

Given the opportunity, did the good banks recapitalise themselves and strengthen their balance sheets relative to the crap they had there?  Why, of course not.  They repurchased US equities and commodities left and right, taking risks by doubling down and trying to beat the house for one big payoff that might get them above water.

The subsequent ramping of US equities is obvious to anyone who can look at a chart.  Now, however, the effect of the stimulus is wearing off very quickly and all these banks and giant hedge funds (see the article on Paulson today on ZeroHedge...) are looking around for a bag-holder of last resort.  They thought they were being cute and clever by ramping the markets on HFT fumes, believing erroneously that the "home-gamer" (see the painting of Cramer today on ZeroHedge...) would soon enter the fray and play the sucker for them one more time.

Only, something odd happened on the way to the end-game: the retail investor not only stayed out of this circus, but he pulled cash out of the markets at bewildering speed (see the article on mutual fund redemptions yesterday on ZeroHedge...).

I know, I know.  You're going, "What the hell does this have to do with the USDCAD pair?"  It turns out quite a bit.

  • There is no other country in the world so dependent upon trade with the UK as Canada.  Australia has China as the local teat.
  • Mr. Market knows the sordid, back-door FX shenanigans being played between the Fed and the Rothschild Bank.
  • The market also knows that the Pound Sterling is in the most tenuous position of its existence (perhaps.  I am no historian...).
  • The relationship between the Euro and the Pound is worsening for the Cable.  The GBP is about to get pounded again as the Euro makes a round trip back to near 0.97, further weakening the export-driven, UK-dependent Canadian economy.

And so and therefore, any hint of weakness in equity markets signals a weakness in risk appetite and investors will flock to the safe-haven USD.  By proxy, the USD will smash the Loonie, not because of anything Canadian, rather as a flight from the Pound Sterling.


Or not.


Cognitive Dissonance's picture


Just when you think an old friend died and went to heaven, they pop back up on the radar. How are you my friend?

Haven't seen you in a few weeks. Did they finally release you from the county jail for jaywalking? :>)

Orly's picture

Sorry...not jaywalking!  Ha!


bonddude's picture

Insidious creep.

drexl spivey's picture

Then again, the gold breakdown could be a false breakdown. I would fathom that there might be a bit of a panic setting in on the Adminstration and the Fed.  We have options expiration next week and that could be coupled with a potential QE2 announcement to get the biggest bang for the buck in equities.  GLD could go parabolic if such an announcement were to occur.

Cognitive Dissonance's picture

Question of the day.

How many HFT computers can fit through a handicap accessible bathroom door (36" wide) in 10 seconds?

Lndmvr's picture

Last I built had to 40".  Changes the equation?

Cognitive Dissonance's picture

Considering the HFT computers are moving at near light speed, I doubt it will affect the calculation. However, I guess my ruler is short a few inches or my 2 year old office suite handicap accessible bathroom door is not national building code compliant. :>)

Anyone? Bueller? Bueller?

John McCloy's picture

Suprised we have not run straight down to a retest of 1040 in the past hour.

Eternal Student's picture

Answer: It depends on how much money is on the other side.

Pamela Anderson's picture

Amazed on how well oil is holding  @$75. 12:45 pm besides the circumstances...

John McCloy's picture

Basically there is Quadrillions in CDS,Synthetic CDOs laying around out there that were responsible for the years of false earnings and there is not enough paper and ink in the world to backstop all of these bets being won simultaneously.

    Another reason why this recent false reform bill is a disgrace for not even attempting to address these "instruments". Why do you think the banks, Fed and administration had to remove the spin off from the bill. They have do not have even close to enough capital  to setting aside reserves to backstop these bets.

Cheeky Bastard's picture

Basically there is Quadrillions in CDS,Synthetic CDOs laying around out there that were responsible for the years of false earnings and there is not enough paper and ink in the world to backstop all of these bets being won simultaneously.


No there isnt; well there is; but there isnt. Its too hot here for me to explain the you all this step by step so just read this.

OCC Q1-2010 Derivatives Report

Cognitive Dissonance's picture

Man, I just knew that speed reading course would pay off some day.

How ya doing Cheeky? Is the homestead suffering through a heat wave? Time to find an old freezer, plug it in and crawl inside. :>)

Catullus's picture

I don't understand the mystery here. If banks are shit, they're not loaning to each other then the system is in a slow motion bank run. The euros are "scarce" because there's never enough to fill the fraud of fractional reserve banking. The demand for euros is up to cover the demands for called deposits. As the credit quality of Eurobonds deteriorates, the euro will increase versus other currencies. Esp if euro banks or funds have to liquidate foriegn accounts and convert them back into euros.

Feel free to say that's idiotic.

Catullus's picture

Read the article, douche

DrLamer's picture

Euro banks CAN NOT "liquidate foreign accounts".

Any bank has so-called correspondent (foreign) accounts. All money transfers in the world are provided via those accounts.



DoctoRx's picture

Why should the financial asset that is physical gold become less valuable just because the insolvency of European financial institutions becomes revealed in a so-called shortage of euros?

Paper gold is another matter, but PHYS (and the real stuff, coins et al) could go up while GLD implodes, no?

Pegasus Muse's picture

That's my view. Physical gold/silver and the funds that actually own physical will go up.  But there still could be some short-term price pressure if there's another liquidity crisis.

I saw a graphic the other day on gold in a deflationary environment.  It actually goes up -- or more accurately, holds its value -- while other asset classes fall when deflation hits. 

I don't worry about inflation or deflation though.  An oz. of gold has the same purchasing power it did 4000 years ago.  It cannot be debased.  It has intrinsic value. 

There is a reason Central Banks hold gold.  It is their asset of last resort.

Grand Supercycle's picture

" the [EURO] rebound and breakout through the 1.27 resistance has shocked everybody as the move is relentless "




Orly's picture

Get ready to go long USD on JPY about the second week of August.  It's gonna be a Dusie!

iPood's picture

Sorry ... keep asking the same question,  but I am still having a tough time juxtaposing this piece regarding "surging" overnight Euribor rates, with the article posted on ZH earlier today, which states, "It appears 3 Month Euribor is so excited about a future so bright, it's gotta wear shades, that it bought a carton of viagra and went a parabolic."

     So, why the divergence between overnight and perceived three-month Euribor (and three-month Eurodollar) rates, futures on which made new highs this morning? Again, I apologize if there is an easy answer that I am just missing. Thank you!