Wow, what a swan dive! The Euro fell a rare five handles and 3 percent against the dollar in just twenty-four hours as ECB President, Jean-Claude Trichet, seemed to back away from his previous hawkish rhetoric at the Bank’s press conference this morning. The big move in the dollar contributed to today’s commodity blood bath, which was probably part of his plan. This guy is one hell of a trader and knows when and where to tap to generate the maximum market reflex.
We’re also thinking Mr. Trichet may be hearing the rivets starting to pop in the highly indebted periphery — Greece, Ireland, and Portugal — who are getting hammered by the 16 percent appreciation of the Euro since mid-January. These countries already have plenty of deflationary pressures to deal with without a rapidly appreciating currency. CNBC reports a “liquidity crisis” may also be starting to brew in Europe,
“Last week, 241 banks bid for money at the ECB repo window. Why are so many banks retracting from the business of lending unsecured funds to each other at 40 percent of the banks in the euro zone need to come to the ECB repo window?” asked Carl Weinberg, the chief economist at High Frequency Economics in a research note on Wednesday. These funds are not attractively priced. We can only assume that banks with excess reserves see an increasing number of counterparty institutions as too risky in the face of an exploding sovereign debt crisis,” Weinberg added. The problem is that Europe’s banks hold an awful lot of Greek government debt, and the debt of others like Ireland and Portugal, on their books.
Pigs do squeal when squeezed and we’re wondering if Mr. Trichet is starting to sweat as more European banks tap the ECB teat. Add this one to your McSwan watch list. (click here if chart is not observable)