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EUR Surging As FX Repatriation Rears Its Ugly Head Again
Back in October, there were those who were confused how it was possible that European sovereign bond yields could be exploding to their highest in a decade, even as the EURUSD keep grinding higher. We explained it, and said to prepare for much worse down the road. Sure enough, much worse came, and was promptly forestalled as both the Fed expanded its swap lines and lower the OIS swap rate, and the ECB "begrudgingly" ceded to LTRO 1+2 (that this resulted in nominal price gains was to be expected - after all humans enjoy being fooled when price levels rise when in reality just the underlying monetary base has expanded). But how did the EURUSD spike fit into all this? Simple - FX repatriation. This was explained as follows: "the sole reason for the EUR (and hence S&P and global 100% correlated equity risk) surge in the past 9 days is not driven by any latent "optimism" that Europe will fix itself, but simply due to the previously discussed wholesale asset liquidations (as none other than the FT already noted), which on the margin are explicitly EUR positive due to FX repatriation, courtesy of the post-sale conversion of USDs to EURs. Which means that the ever so gullible equity market has just experienced one of the biggest headfakes in history, and has misinterpreted a pervasive European, though mostly French, scramble to procure liquidity at any cost by dumping various USD-denominated assets, as a risk on signal!" It appears we are now back into liquidation mode, and the higher Euro spread surge, the faster EURUSD will rise as more and more FX is "repatriated." In other words, as back in the fall of 2011, the faster the EURUSD rises, the worstr the true liquidity situation in Europe becomes: a critical regime change, which will naturally fool the algos who assume every spike up in EURUSD is indicative of Risk On, and send ES higher when in reality, the underlying situation is diametrically opposite.
For those who missed the article back in October 2011, here it is again:
The Biggest Market Headfake Ever: Is A Wholesale French Bank Liquidity Run The Sole Reason For The Euro, And S&P, Surge?
Over the past two weeks, there is one simple thing that has been bugging skeptical macro observers: namely the paradox of i) just how ugly the European funding and liquidity situations have gotten, on the one hand, confirmed by the blow out in French bond yields (the French-Bund 10 year spread just hit an all time record yesterday) as well as continuing deterioration in credit spreads across core European nations, yet, on the other, ii) the euro, especially in that critical pair the EURUSD, has seen one of its most explosive rises in recent history, which as Zero Hedge pointed out yesterday, has totally decorrelated with the French-Bund spread, to which it had been firmly 'pegged' previously. As a result of ii), equity markets have surged due to legacy correlation arbs, which see Euro strength, and hence dollar weakness, as an empirical signal of equity "cheapness", which in turn leads all algos to treat a rise in the EURUSD as a buying signal. So how is it that even with the interbank liquidity situation in Europe frozen and getting worse, further keeping in mind that European banks are now expected to (or have already commenced - see yesterday's move in PrimeX) engage in widespread asset liquidations, that broad market risk is perceived as cheap? Simple. As the following note by Deutsche Bank's Alan Ruskin explains, the sole reason for the EUR (and hence S&P and global 100% correlated equity risk) surge in the past 9 days is not driven by any latent "optimism" that Europe will fix itself, but simply due to the previously discussed wholesale asset liquidations (as none other than the FT already noted), which on the margin are explicitly EUR positive due to FX repatriation, courtesy of the post-sale conversion of USDs to EURs. Which means that the ever so gullible equity market has just experienced one of the biggest headfakes in history, and has misinterpreted a pervasive European, though mostly French, scramble to procure liquidity at any cost by dumping various USD-denominated assets, as a risk on signal!
In other words, an internal bank run has somehow been interpreted to be stock positive... And there is your explanation for not only the paradoxical surge in the EURUSD and S&P, but why the correlation between the EURUSD and the Bund-France spread has completely broken down. Expect all of this to promptly, and very violently, correct once the market understands what an idiot it has been in the past two weeks.
From Deutsche Bank:
In the last few days there has been talk that European bank repatriation of capital may be behind EUR strength. Setting aside the timing of asset sales, and the reduced universe of potential bidders for these assets, it is worth considering what happens when a European bank sells USD assets. European banks in aggregate are regarded as having a still sizable shortfall of USD liabilities. The BIS has done some of the most comprehensive work on the USD shortage (see in particularly working paper: www.bis.org/publ/work291.pdf ). The most recent data for the end of 2010 (see the latest BIS annual report page 104), suggested the funding shortage had declined by at least half compared to before the 2008 crisis. More recently. the dependence on cross currency funding has gone up again, with the decline in US money funding. (DB’s Bill Prophet showed EUR region CDs of 7 of the 10 largest US money funds fell by over $70bn from May through September). Given this collapse, it is likely that European banks that do successfully sell USD assets, will try maintain the corresponding USD liability to mitigate against USD term funding that may not be rolled in the future. If a European bank sells a USD asset, it probably reduces the European Bank shortage of USDs by the sales amount. A smaller ‘USD shortage’, at the margin reduces the risk of a short USD squeeze of the sort seen in 2008, and to that extent is a minor USD negative, and EUR positive. It also fits with the EUR cross currency basis swaps coming in slightly of late, although this almost certainly has more to do with global risk appetite. This marginal USD negative, EUR positive impact, should not however be confused with a foreign exchange transaction whereby USD’s are converted into EUR.
Even Deutsche Bank is scratching its head to explain the dichotomy between the funding market and general risk. They do, however, provide the only real explanation, as opposed to the widely trumpeted by market cheerleaders ridiculous explanation that this is merely the latest "hope" rally. Ridiculous, because if that was the case, one would see a thawing of interbank liquidity and defaults spreads. As Zero Hedge readers know, 100% the opposite has happened.
Note also that the EUR is going in the opposite direction to much purer gauges of EUR tensions in the bond market. The collapse in OATS today is a major story. This is not least because France is experiencing the negative side of its (still) AAA status and being a member of the core - the fiscal transfers are going toward the periphery and away from the core in terms of ability to tap the EFSF for bank recaps, and possibly bond insurance/guarantees. In the past, we have noted that the periphery flows fleeing toward the core has tended to leave the EUR trading like a closed system to the outside world, which is one explanation for surprising EUR resilience to periphery travails. The latest French balance of payments data (http://www.banque-france.fr/gb/statistiques/economie/economie-balance/ec... ) again shows large French portfolio inflows that are very surprising, although the large errors and omissions do suggest the data is incomplete. (In the future, Target 2 balances will be another vehicle to use to check the degree to which inflows are being concentrated in Germany solely). In any event, instability in the French bond market has the capacity to significantly reduce points of refuge for risk averse funds at the EUR’s (shrinking) core, and adds to DB FX team’s doubt about the sustainability of the EUR’s rally...
And so on.
Naturally, the Eurocrats will be delighted to associate the run up in risk assets and the European currency as a confirmation that the market is interpreting further lies, innuendo, and confusion as a risk on indicator, and is encouraging their behavior, when nothing is further from the truth. However, the biggest beneficiary of the recent move is none other than the insolvent French banking system, whose very own liquidity run has caused asset values to soar, on an epic misinterpretation of underlying market signals, and thus sell even more into market strength, when in fact the market should be selling alongside France...
As for unwind catalysts for this most insidious market move, we are confident that the inability of the G20 to come up with any resolution over the weekend in Paris, nor the Eurozone Summit in one week to actually present any relevant details vis-a-vis the continent's bailout, or the EFSF's expansion into some multi-trillion Bailoutstein monster, will not be met too happily by a market which has just realized it has been thoroughly fooled by the cash-crunched French banking system.
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Oops, no wait, it'll collapse right after.
How does that look on the DXY? I suppose there are several ways to interpret this little 'deviation'.
macro will eventually prevail---the algos already forgot 2008
The geeks also forgot to program for headfakes.
Markets tracking the euro when it goes up but not when it goes down. mmmmmmk
KING EURO
The dollar is the joke. The dollar is the worst out of the big 3, not the best but nobody on this planet agrees. Biggest lop sided boat in history.
Who thinks the dollar is better then the Euro or Yen besides everyone ?
And like the kings of old, the Euro will be short lived and covered in shit.
No fiat currency is better or worse than any other, the same way no ant is better than any other under a magnifying glass on a sunny day. One may be first, and one may be last, but they are all going to wind up as little specks of char on the dry ground.
Ahhh the same old closet dollar lovers line.
"No fiat is better then any other blah blah blah"
I will tell you what is better... the Euro and the Yen are better.
What did the "market" do since last October? It practically went vertical.
Yeah thats how I see it too. So is the implication here that the market will run another 20% from here?
It is going to be kinda hard for non-European markets to go up when the Europeans are liquidating their non-European equities.
Woot! The algos are now set to Risk On Bitches!
Tyler, while that may explain the EUR, what about the correlated rise in the pound? Are you suggesting there is a liquidity run in British banks?
this analysis makes sense. disclaimers on some french bank bonds have been added lately with a noticeable increase of capital requirements and "qualified" status to buy this stuff. a yellow light, if not red.
hey tyler! this didn't take long!
BIS trader removes gold 'interventions' from his biography
By: Chris Powell
ZeroHedge today catches the Bank for International Settlements admitting and then trying to cover up its services to member central banks in surreptitiously manipulating the gold market, work the BIS was positively advertising a few years ago in a promotional brochure for prospective central bank members that GATA brought to your attention in February...
no bankster's ass left unmolested! L0L!!! kick 'em again, harder, harder!
yes, it is repatriation time, again; even for US peeps in argentina? elsewhere? where you feel safe?
and: of course, the check is in the mail...
Now everyone on ZH needs to create a "gold bug" profile and then try to connect with him...lmao
just buy some PMs w/ a credit card & have it shipped to your address, at this point, and you will be profiled
same as signing up, here, really, but just by different people, for different "reasons"
tyler is our publisher; anything else is gravy and strawberry fieds, and there's plenty of both and then some here, for people who like to eat...
Good catch slewie!
Now about my blog... LOL and :)
Goldbugs in for a ride once real assets need to be liquidated. If fiat is done , those reasons given to predict a tenfold increase could as well justify half price for the newly enthroned real money. Reset.
I prefer to see it as excitement in anticipation of a brand new printing round.
This circular logic is fucked up. If a European bank is selling $ assets, somebody else is buying them. That doesn't imply the markets are under or over valued, per se.
If someone is fireselling, someone is dying. No one is allowed to die in the land of TBTF derivatives on leverage.
hence the term "zombie banks".
though some are vampires and one is a werewolf that is afraid of silver
weird, the other assets not too much responding - particularly gold, but stocks also not so impressed. Back in October you actually had a large correlation. The sudden drop in volatility and volume @1.314 also quite stunning
The wisdom of the great Ben Bernank. Perfect balance at Dow 13,000 again.
It's options expiration week. duh! trading desks doing what they always do on the 3rd week of the month.
It is good to see an article where it is clearly explained that a liquidity squeeze in Europe has the same effect on the EUR as one in the US has on the USD.
A Top will wobble just before it falls....
OK folks this is a € headfake in the last week before the french presidential election.The Socialist party will reach the first round as victorious and the very sensitive question is who will be the number 3 ( since it's clear Sarozy the conservative is doomed to no.2 slot). No. 3 position in the first round will dictate the policy agenda of the coming socialist President.If the no.3 slot is won by the Communist hard-liner Melanchon ( right now expected to win 14% of the votes ) then the Socialist president will have to include him and his fellow bolcheviks ( anti-european, anti-german leadership ) into the government for more hiring of bureaucrats, and wll try to renegotiate the European Union treaty to alleviate the fiscal discipline.There will be a strong distrust towards the BCE discipline and each weak country in Europe will feel free to ask more leniency towards budget-cutting and fiscal austerity.
The EURUSD goes up because "France" wants Euros more than USD? Granted they are proposed to use those euros to backstop their banking system, but that doesn't smell right. Is "France" that big a player that a shift in their perception results in a significant increase in the value of the euro? What about the PIIGS+?
http://www.oanda.com/currency/big-mac-index
French banks have that much power? The euro is overvalued by 5-11%?
If French banks have that kind of market moving power, how have their assets sales affected the US. What types of assets did they sell? Equities? Bonds? Sovereign CDS? French banks sell and have no meaningful effect on the asset classes they sell into yet they can significantly move the EURUSD rate?
When in doubt, look behind you. There appears to be a new source of USD that are being converted into EUR. Could this source be the much maligned boutique USD floating around in the world that were created by artisans? Why would the US accept these works of art? Maybe the US is providing USD to be converted into EUR to help France? After Hollande wins and detonates France, their recently bolstered banking system might be able to survive and purchase a small piece of the remaining pie.
... Is that too political?
All these bankers need to agree on one real financial asset, which only has utility as a financial asset, that they can use to back all their paper and push its price up until they are all capitalized with real collateral. I wonder what asset has historically served that purpose?
Wait, wait, I think I know what you mean...
Something barbaric relics are made of?
HEARD ON THE STREET:- WATCH OUT FOR THE SAME IN SWITZERLAND AND ITS BANKING INDUSTRY WHERE BANKS ARE PREPARING DURING THE SUMMER PERIOD TO DUMP ALL THE WORTHLESS REAL ESTATE SITTING IN THEIR BOOKS, HENCE WEAKINING THE CHF BUT POTENTIALLY STRENGHTENING THE EURO FURTHER....
This China news about banks being allowed to short the dollar probably is not helping either.
http://www.reuters.com/article/2012/04/16/us-china-banks-dollars-idUSBRE83F0U620120416
Can't be ready for the dollar implosion if it is illegal to be ready for the dollar implosion.
The Big Picture Wile E. Coyote Equity Top.
http://www.zerohedge.com/news/2012-12-24/market-analysis
why do i need a trillion on my back, when i can get by on just half,... said the mule to the ass - its a load off our backs, the ass quickly shot-back! oh, said the mule as he pondered the thought,... we both get fed twice, and that settled that ?
I do not understand this story about the french banks'repatriation. They sell USD assets because of reportedly USD funding problems. Ok maybe. But I cannot believe that their USD assets were funded in euros ! If they sell their USD assets because of funding problems, most probably they reduce their USD liabilities at the same time. Where is the FX transaction? I do not see them buying euros with the proceeds of their USD asset sales. Or what kind of assets can they be? fixed assets ? It does not make sense.
The French have always had a great bilateral trading partner with china. In fact, it was the French that brought mobile communication first to China, and if my memory serves me correct,... nuclear power.
The Chinese are much more comfortable dealing with the French, [UK/ US/ Germany ? are peripheral in nature] period!
jmo
GH A-share Mkt Summary, APRIL 17
http://www.cnhedge.com/thread-3887-1-1.html
http://www.jinrongbaike.com/