The European common currency makes another drop Friday, after governing Council member Axel Weber was quoted saying that ECB should extend unlimited lending to banks past the end of the year and resume exit discussions in early 2011. In addition, there are rumors that the SNB is unwinding its hundreds of billions of EUR holding.
“Since inflation risks continue to be low over the policy- relevant medium term, this does not suggest a policy tightening yet.”
The financial markets had been expecting the ECB would decide next month to keep in place its remaining emergency support for still-stressed bank-to-bank lending, eschewing any aggressive withdrawl of stimulus, Reuters reports.
Weber, however, is regarded as one of the ECB’s most outspoken inflation fighters and his comments in favour of maintaining loose policy sent the euro EUR down 1 percent to a five-week low against the dollar.
It fell to a seven-week low against the yen EUR/JPY.
News agency Bloomberg reported that Weber said it would be “wise” to keep full allotment in weekly, monthly and three-month refinancing operations until after the end of the year. “Most of these discussions about the continuation of the exit I think will be focused on the first quarter,” Weber said in an interview conducted on Thursday.
The comments bring the Bundesbank chief in line with fellow policymakers such as Athanasios Orphanides and Patrick Honohan, who have also signaled the ECB’s liquidity largess will continue.
The ECB is due to make a decision about whether to extend unlimited lending at the weekly, monthly and three-monthly operations at its next meeting on Sept. 2 and Weber’s comments bolster expectations it will be renewed until January.
“Since Mr Weber has historically positioned himself at the hawkish end of the Governing Council spectrum, his comments strongly signal that the ECB is likely to decide to continue with its current operations till at least early 2011,” Barclays Capital economists Julian Callow and Laurent Fransolet says.
The ECB has said that unlimited liquidity will be on offer in the shorter term, one week and one month operations until at least mid-October, and until the end of September for three-month money.
The end of the year was “usually surrounded by some uncertainty regarding the liquidity situation,” Weber says.
Weber stressed though that the improving economic outlook meant generous liquidity supplies could not be kept in place indefinitely and said he saw no need to offer more very long-term funds, such as over six months.
“It’s clear that we need to re-embark on a normalization procedure,” he says.
Additionally, there are rumors that the Swiss National Bank (SNB) is unwinding its hundreds of billions of EUR holding.
“The indirect evidence: a surging CHF, which however could merely be a return to the flught to safety of the old regime, as Europe once again realizes just how bad things truly are beneath the surface,” Zero Hedge writes.
According to the Forex Blog there are a handful of Central Banks who are making their presence known on this front.
“On several occasions over the last few weeks, the Central Bank of Switzerland (SNB) has unloaded massive quantities of Euros. If you recall, the SNB amassed nearly €200 Billion over the previous year, as part of a massive buying spree aimed at holding down the value of the Franc. Given that the Franc has appreciated by more than 15% against the Franc this year, it’s perhaps unsurprising that the SNB is throwing in the towel,” the Forex Blog wrote last week.
Analysts from Morgan Stanley foresees a similar trend: “Central banks are likely to let their euro holdings slide as a percentage of the total, reflecting lingering concerns about the euro zone’s fiscal outlook…’We do not expect that central banks will provide as much support for euros as in the past. They have prevented the euro from depreciating more rapidly… but they are unlikely to stop its depreciation.’ ”
The implication is clear: the Euro is facing (passive) pressure on multiple fronts.
Here’s today’s market snapshots:
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- ECB to weigh exit plan in first quarter: Weber (marketwatch.com)
- Weber Says ECB Should Plot Out Exit Strategy in First Quarter (businessweek.com)
- ECB Weber: Should Keep Current Liquidity Until Yr-End – BBG (forexlive.com)
- Euro Drops to Five-week Low as Weber Signals ECB Measures Stay (businessweek.com)
- Currencies: Dollar up as Weber’s liquidity remarks hit euro (marketwatch.com)