Tackling Liquidity, Policy, Geopolitics & Solvency
Today's coordinated central bank liquidity injections coincide with liquidity concerns as USD LIBOR nears the highs of June 2010 at 0.53%; policy concerns, the European Financial Stability Facility (EFSF) and austerity deadlock; geopolitical concerns (storming of UK Embassy in Tehran) and solvency concerns as signaled by implicit (voluntary) default from Greece.
The last coordinated central bank liquidity injections, Sept. 15, coincided with the three-year anniversary of the Lehman bankruptcy and three days after EUR/USD hit seven-month lows in the midst of EFSF deadlock and soaring U.S. three-month LIBOR. Today's coordinated central bank injections aim at completing the Sept. 15 operations, two of which will mature next week. Back then, the ECB, Fed, BoE, BoJ & SNB agreed to conduct USD- liquidity injecting operations with a three-month maturity, covering the remainder of 2011. Two of those operations are due to mature on Dec. 7 and Dec. 8, allowing an outstanding operation to mature on March 1, 2012.
The timing of PBOC's first reduction in required reserve ratio (RRR) in three years (to 21% from 21.50%) coinciding with unusually dovish remarks from ECB sources indicating ECB "open to rates cuts 1% no longer seen as refi floor" "ECB may also widen collateral framework in December" is therefore not be a coincidence.
In a signal that China remains cautious with inflation, the Peoples Bank of China (PBOC) began its easing cycle via the required reserve ratio on major banks, instead of lending and deposit rates (which were last raised in June). Recall that in 2008, the PBOC began its easing cycle by slashing benchmark lending/deposit rates two months before reducing the RRR.
Global Inflation rates (see above charts) shall continue declining, reflecting falling growth rates in BRICS & developed nations. Meanwhile (as in 2007-08), global equity markets have already peaked before the peak in global inflation rates. With the 2007-08 pattern set to re-emerge, the simultaneous decline in equities and inflation and growth suggests the downtrend from the April peak is here to stay and each and every rebound is nothing more than a short-term corrective move. S&P 500, Dow and Dax are seen limited at 1235, 12300, 6300 respectively, while rebounds in EUR/USD, GBP/USD & AUD/USD are seen capped at 1.38,1.5950 and 1.05 respectively.
Ashraf Laidi is an independent strategist and author of “Currency Trading and Intermarket Analysis.” His analysis appears daily at AshrafLaidi.com