Europe, Australia, New Fed Governors Confirmed

The euro was already recovering from the bout of profit-taking in Asia that had seen a low recorded just ahead of support pegged at $1.3550, when news that the European banks borrowed considerably less from the ECB than anticipated and this sent the euro to $1.3675. Recall that 225 bln euro refi operations were maturing today.

These included the rump of the 12-month and 6-month facilities which no longer exist. The ECB offered 3-month funding yesterday. European banks took 104 bln, which was obviously on the light side, but dealers did not want to draw any hard and fast conclusions ahead of today’s 6-day funding made available today. However, banks only wanted to borrow 29.4 bln euros, a little more than half of what a Reuters poll suggested was likely. The combined 135 bln euro in the two days means that there is 90 bln euro less liquidity sloshing around the banking system. This will reinforce official perceptions that the banking system in general in Europe is healing and sufficiently so that it can continue to proceed with a further exit of some of its crisis measures.

Irish officials should be pleased. The government announcement about the cost of financial support was greeted with a strong bond rally that has seen the Irish 10-year yield fall 13 bp, fully recouping what it has lost in the past five sessions. On top of the 22.9 bln euros already provided to Anglo-Irish Bank, the government says another 6.4 bln euros is needed. On top of that, it under new stress conditions, an additional 5 bln may be needed and the sum is fairly close to the S&P warning that 35 bln euros may be needed.

In addition, the government projected Allied Irish banks would need an additional 3 bln euro and Irish Nationwide may need 2.7 bln euros. The market is acting as if these figures mean that Ireland may not need to tap the EFSF. However, the rally in Irish bonds may also have been boosted by Finance Minister Lenihan’s confirmation that because of market conditions, i.e., high yields being demanded, Ireland not hold is scheduled bond auctions in Oct and Nov. Fitch immediately warned that Ireland’s debt rating is not secure. Meanwhile, as well telegraphed, Moody’s cut Spain’s sovereign rating from AAA to Aa1 and is not in line with Fitch and one notch above S&P. There might be some relief that Moody’s move was only one notch and the outlook was seen as stable. The gain today in Spanish bonds has also been enough to offset the weakness seen over the past five days.

The Australian dollar is has appreciated almost 9% this month against the dollar, but is struggling a bit today. The hawkish comments of by the RBA had spurred a shift in the pendulum of expectations toward a rate hike next week. In addition to the firm commodity prices and the favorable PMIs from China had helped spur the buying. However, disappointing building approval data earlier today (-4.7% in Aug vs expectations of a flat report coupled with a sharp downward revision in July from 2.3% to 0.1%) have prompted second thoughts by market participants. The market now appears to be seeing it as a closer to a 50/50 call rather than 70% likely as recently as yesterday.

Late last night, the Senate confirmed two of the three Federal Reserve candidates, Yellen and Raskin (former as vice chairman and the latter as governor). This is important because it they are seen as centrist to dovish and are seen as part of the emerging consensus to provide more support for the economy. As we noted at the time, the FOMC had been operating on the light side with only 4 of the 7 governors in position.

The hawkish wing of the Fed is clearly coming from some of the regional Fed presidents. Because of a technical glitch the confirmation process of Diamond for the third nominee, it may have to begin over, which at this late date mean it is unlikely to happen before the Nov 2-3 FOMC meeting.