Great Graphic: EONIA Being Squeezed Higher, Likely Seasonal Noise

This Great Graphic is a Bloomberg chart of the EONIA, a key short-term interest rate in the euro area.  It stands of the Euro Overnight Index Average. 

Three things are immediately evident.  First, overnight rates trade close to the zero deposit rate.  The refi rate, now at 25 bp, is less significant.  Second, there are periodic spikes that seem to be associate with month end pressures.  Third, EONIA has been rising in recent days.  

EONIA finished yesterday at almost 11 bp, up about 3 bp from the end of last week.  The timing of the move rules out news that seems to be only available today.  The ECB suspended early LTRO repayments for a couple weeks around the turn of the year.  The LTRO repayment announced today for next week's settlement was more than twice last week's payment. Using a 30-day moving average to hone in on the trend, EONIA has mostly averaged 7-9 bp this year.  Looking at the performance of the over the last several years, it is hard to argue that EONIA volatility has risen, though the month-end spikes this year seem more common than before the ECB adopted a zero deposit rate.  

 In the US, overnight money  tends to be considerably more volatile.  Yesterday, for example, Fed funds traded between 5 bp and 37.5 bp.  The effective rate, a weighted-average, was stable at 9 bp.  With the exception of the periodic spike in EONIA, the effective Fed funds have generally yielded more, since the middle of last year.    If EONIA is sustains a move through the effective Fed funds rate, that may be a signal of further pressure on the dollar.  

The signal from the Federal Reserve is driving home the point that tapering is not tightening.   This seems to imply a willingness to see curve steepening, where the long-end retreats some, but that the short-end does not bring forward a Fed Funds rate hike.    Indeed, this is precisely what has happened since the stronger than expected employment data in early Nov.  The implied yield on the Dec 2014 Eurodollar futures has fallen 7 bp and the implied yield on the Dec 2015 Eurodollar futures has fallen 13 bp.    

The signal the ECB is trying to send is that there are many steps that it can still take and does not want to rule any out.  Draghi has been saying for more than year that the ECB is technically ready to have a negative deposit rate.  Clearly, it is rightly reluctant to do so.    Before other steps are exhausted, it does not seem realistic to expect the ECB to contemplate measures high risk measures with unclear/uncertain benefits, like a negative deposit rate, let along unconditional buying of sovereign bonds under a QE scheme.