The world’s leading central banks have come to the rescue of the European banks’ USD funding crisis with the announcement of unlimited amounts of USD liquidity operations. The new ECB liquidity operations underlies a key driver over the past two months as European financial institutions have been unable to secure USD funding, thus pressuring European banking stocks while increasing demand for the USD.
Early in the North American trading session the ECB announced additional 3-month liquidity provisions in coordination with the Fed, Bank of England, Bank of Japan and the Swiss National Bank. This is in addition to the 7-day dollar liquidity provisions the ECB currently provides. Immediately following the announcement the three-month euro-dollar cross-currency swap dropped to -86.6 bp from -92, a sign of increased USD liquidity.
With the new liquidity measures coordinated with the major central banks of the world, one must wonder about the extent of the funding crisis in the European financial system. Two European banks have already accessed the ECB’s USD Auction Allotment worth $575m. While the move by the ECB is constructive it may keep the pressure on European equities as well as the EUR.
The USD tumbled on the announcement with the EUR/USD rising as high as 1.3935, a level that coincides with the hourly trend line that falls from August 30th. But the EUR looks to be unable to hold the daily highs as the surge may have offered better entry levels into the EUR downtrend. Resistance above the trend line is found at the previously broken trend line from the Q2 2010 low at 1.4010. Support is at the upper boundary of the recent consolidation pattern at 1.3810 followed by 1.3650.