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When French free diving champion Guillaume Nery base-jumped down Dean's blue hole in the Bahamas, the video showed him making landing at 370 feet. In fact he never reached the rock bottom of Dean's hole, which would have taken him down 663 feet, an impossible feat (so far) for the human body.

The last week felt a little bit like a free-dive for the euro, when it fell 1.3% to $1.3144. It did rise a smidgen against the yen, by .3% to 123.12 yen. Is the euro in Dean's hole territory (I imagine the euro shorters never felt the same kind of gratification as Mr. Nery felt in his base jump, describing the sensation as "experiencing infinity" in one interview)?

Well, the official line by the ECB was that some long-term refinancing operations, which came due, were repaid earlier than anticipated, but less than expected. The markets overreacted, as usual, when anything happens that is not anticipated and "priced in". (One wonders, by the by, if Mr. Nery would still be alive after his multiple free falls into the abyss, if he had the same attitude towards his free-dives as markets did last week, but that's another matter).

In fact, the ECB registered a spike in its overnight lending facility loans on the 19th of February, at 5 billion euros, with prior mini-spikes on the 29th of January and the 5 of January.


(Click to enlarge)

Source: Daily liquidity statistics, ECB

The three year LRTO credit facility, secured by the ECB, resulted in settlement on December 22, 2011 and then again March 1, 2012. These were, in fact, one-year operations resulting in a total increase in liquidity to the euro system of 480 billion euros, with the possibility of early repayment. The first opportunity was last week, when approximately 167.2 billion euros were repaid, less than was anticipated, leaving markets in a hissy fit of spoiled expectations.

Other developments of banks in the eurozone tell a story that is somewhat inconsistent with the LRTO story. Banks seemed to be hungry for short-term liquidity (above diagram), but they were also squeamish in lending themselves. Separately, the ECB reported tighter credit practices December of last year, and a decrease of loans to both household and for consumer purchases. What gives? The ECB in decomposing the problem, on the supply side, reported little change due to economic conditions or the cost of capital. On the demand side, however, there seemed to have been a substantial decline in the demand for loans, from both small and large enterprises, but stronger for long-term loans than short-term loans (a respective decline of 30% and 16% respectively).

Shoring up for future increases in short-term liquidity? Thus the next question is to see ho well banks are anticipating needs for short-term liquidity, if the story in the official ECB bulletin is to pan out.

The Euribor futures for March delivery tells a tale of increasing short-term rates expected for the near term.


(Click to enlarge)

Source: Investing.com

Even more interesting is the information from open interest on the Eurex 3-month Euribor contracts extending out to December of this year (the Eurex was formed through a merger between the Deutsche Borse and the Swiss exchange)

Delivery Month

Underlying Closing Price

Settlement Price

Traded Contracts

Open Interest (adjusted)

March 2013

0.00

99.79

0

4,108

June 2013

0.00

99.77

0

1,366

September 2013

99.73

99.73

3

835

December 2013

99.68

99.68

2

1,392

March 2014

99.61

99.61

10

511

June 2014

99.54

99.54

4

219

September 2014

0.00

99.47

0

160

December 2014

0.00

99.40

0

438

March 2015

99.32

99.32

2,006

6

Source: Eurexchange.com

Increasing 3-month rates expected by the markets. Combine this with the shifting liquidity needs of the banks according to the ECB, and one can fairly say that the medium to long-term perspective for the euro remains fairly bullish. Euro base jumpers beware!

Source: Re:Euro Liquidity Chronicles