The European Central Bank said it will lend dollars to euro-area banks in a series of three-month loans to ensure they have enough of the U.S. currency through the end of the year.
The Frankfurt-based ECB said it will coordinate with the Federal Reserve and other central banks to conduct three dollar liquidity-providing operations with a maturity of approximately three months. The loans are in addition to the bank's regular seven-day dollar offerings and will be conducted as fixed-rate tenders with full allotment, the ECB said in a statement today. It will offer the loans on Oct. 12, Nov. 9 and Dec. 7.
The euro jumped more than a cent against dollar after the announcement and traded at 1.3890 at 3:24 p.m. in Frankfurt.
Two banks this week borrowed dollars from the ECB in its seven-day operation, a sign they are finding it difficult to access the U.S. currency in markets as Europe's debt crisis makes financial institutions more wary of lending. The premium European banks pay to borrow in dollars through the swaps market is close to the highest level in almost three years.
"The ECB is seeing the stress in the dollar markets right now," said Benjamin Schroeder, a rate strategist at Commerzbank AG in Frankfurt. "If there was really a big problem you'd see more demand in the seven-day tender. The ECB is trying to prevent things from getting out of hand."
Eoin Treacy's view Sovereign
bonds of major issuers outside the Eurozone's periphery have been perceived
to be a safe haven over the last few months as concerns about a global economic
slowdown, the USA's fiscal crisis and the Eurozone's periphery dominated headlines.
As a result yields on a number of issues have dropped to historic levels. Speculation
on a fresh bout of quantitative easing has been rife. Traders have been positioning
themselves for such an eventuality by initiating long positions in what has
been an impressive momentum move.
On previous occasions, the reality of quantitative easing has not been bullish for sovereign bonds because once initiated supply surges and overwhelms demand; creating a bearish environment. Today's announcement that the Fed and ECB are again cooperating in making Dollars available is a positive in terms of making liquidity available to the European banking sector and may also bolster investor confidence. Tomorrows EcoFin meeting could also potentially provide some favourable news flow.
Over the last month, US 30-year Treasuries have lost momentum in the region of 140. A significant additional economic deterioration would likely be required to stoke further demand, but a sustained move below 135 would be required to break the progression of higher reaction lows and suggest a quicker reversion towards the 200-day MA is underway.
US 10-year Treasuries have been ranging around 130 since early August but a sustained move below 127 would signal swifter mean reversion. The 5-year has posted a progression of lower highs since mid-August and is testing the lower side of the one-month range. A sustained move below 122 would complete the short-term top.
Commonality has been a hallmark of the advance in Treasuries, Gilts, Bunds, JGBs, the Canadian, Australian and Swiss bonds. All have hit at least near-term peaks but additional declines would confirm a change to the demand dominated environment.