Investor's window  |  February 01, 2013 13:44:44

ECB withdraws liquidity from the market. Euro reacts surge

While the U.S. central bank's balance sheet should rise this year to one trillion U.S. dollars, the ECB balance lately through contractions. It was also enhanced with the recent withdrawal of liquidity from the interbank market, the ECB flooded commercial banks a year ago, when their three-year term in the refinancing operations (LTRO) has provided loans worth more than one trillion euros. Although it was a three-year low-interest loans from the ECB, banks are given the option to pay them a year early, and 278 of these options a few days ago actually used at least in part. ECB balance in February due to fall by 130 billion euros up to 2800 billion, which is approximately 300 billion below the record level of the middle of last year.In addition, in late February ECB to commercial banks early next installment, so it is highly likely that the reduction of its total assets will continue.

Would be interested in something like this should primarily Forex traders. It is precisely the monetary policy, which is the most important and long-term in essence the only determinant of the exchange rate. This is demonstrated by the figure below, showing the proportion of balances of U.S. and European central bank and its correlation with the rate of European currencies to the U.S. dollar pair.

EURUSD (gray), balance sheet Fed / ECB (White)

The correlation is very strong, particularly in recent years when both Fed and ECB resorted to quantitative easing. Whenever this share grew (Fed loosened monetary policy more than the ECB), the euro strengthened against the dollar and vice versa at any time declined, the euro weakened. The end of one of these cycles brought the first quarter of 2012, when the ECB to stop pumping liquidity on the interbank market purchases of bonds and other LTRO. Although the dollar for several months, gaining in the middle of the year, but bounced from the level 1.20 EURUSD and since then has lost 13%.

The picture above also shows that a new cycle, when the proportion of the two balances is growing again, started at the beginning of 2013.While the ECB gradually reduces its balance sheet, the Fed intends to continue its expansion rate of $ 85 billion a month. Until when, I do not know. Purchases are is unlimited. Sale to the dollar lately watching, but thanks to this fact in the back of a very strong foundation and although the price of the euro in recent weeks much blew, the fall of the dollar just probably will not end quickly.

Jaroslav Brychta

Jaroslav Brychta - principal analyst at X-Trade Brokers

  • He graduated from the Economic Policy at the Silesian University in Opava. The XTB operates since 2007, currently as chief analyst. It mainly deals with the analysis of exchange rates, as well as bonds, the banking sector and monetary policy. His professional articles and interviews contributes to most of the leading media.
  • Logo XTB X-Trade Brokers (XTB) is an international brokerage house that provides its clients with professional trading conditions for forex, commodities, stocks and options. Its services are constantly improving, as evidenced by a number of international awards and it is confirmed by the titles Broker Forex broker and theObtained at the Investment Summit MoneyExpo 2012th

    In addition to the standard menu XTB allows Forex traders direct access to the market, thus enabling them to reach the lowest spreads. Beginning options traders can use the optional possibility of opening an account with no minimum deposit of 2500, - CZK . For XTB offers its clients advice on trading, 24 in the Czech language support, free training courses and daily news from the financial markets.
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