We mentioned earlier that the Euro has been on a jaw-dropping tear.
That continues today. Yesterday the euro was around 1.34. Today it’s at 1.355.
Why is it going nuts?
We chatted with analyst Lorcan Roche Kelly of Trend Macrolytics to get his take.
Well the big picture is that the ECB is the only central bank that’s acting relatively “tight” right now. The Fed will be on hold for a while. Japan is doing new easing. The Bank of England is likely to do more under Mark Carney. You get the picture.
The specific story today that’s got people excited has to do with the ECB’s LTRO operations.
Remember at the beginning of 2012, the ECB held a bank-saving operation, where they gave banks cheap loans for up to 3 years in order to smooth the crisis.
Well things have really calmed down, and now banks are repaying their LTRO loans, in part to show that they’re strong and can stand on their own two feet.
About $137 billion of the LTRO loans is being paid back.
But today there was a 3-month LTRO operation, and the thinking was that maybe these banks who were paying back their 3 year loans early would roll into 3-month loans.
But that wasn’t the case.
As you can see here, just about $3.7 billion is being allotted in this operation.
So those banks paying back their long-term loans aren’t just rolling back into short-term loans. They’re actually cutting their dependence on the ECB more generally, which is an excuse for euro bullishness.
The LTRO paydown will cause the ECB balance sheet to shrink (!) next week. A shrinking balance sheet is rare in this day and age, but as Roche Kelly notes this shouldn’t really be characterised as a tightening, since the ECB’s policy stance remains the same. If banks need money, it’s no more expensive than it was before, so there shouldn’t be any real-world economic constraint by this balance sheet shrinkage.