Better Than Expected IFO Lifts Euro Off Its Lows |
By Boris Schlossberg |
Published
08/28/2007
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Currency
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Unrated
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Better Than Expected IFO Lifts Euro Off Its Lows
Another round of risk aversion hit the currency market during the Asian session after traders learned that Boston based State Street bank held $22 Billion worth of exposure to asset backed commercial paper conduits. These arcane sounding investment vehicles were simply a means by various financial institutions to borrow at lower short term rates in the commercial paper market and invest the proceeds into longer term maturities of asset backed securities. Unfortunately with credit in the commercial paper market markedly more difficult to obtain over the past few weeks, many investors in this market have been unable to roll over their obligations. According to regulatory filings, the Boston-based bank has credit lines to at least six conduits, which account for 17 per cent of its total assets. That proportion makes State Street the most highly exposed bank to conduits among its European and American peers. The news set off another wave of EURJPY selling which pressured the EURUSD lower. At one point the pair dropped to 1.3617 in relatively nervous trade.
The euro however, found its footing after the start of European trade and the release of the IFO survey. On Sunday we stated in our weekly report that , “the IFO survey will be the marquee event of the week with market participants anticipating a sharp contraction in the wake of recent market turbulence. Yet the industrial sector is far less affected by the volatility of the capital markets and therefore an upside surprise is not out of the realm of possibility.“ The IFO did indeed print better than expected registering a reading of 105.8 vs. 105.4 forecast. Although this was the third consecutive monthly decline and the worst result since October of 2006, it nevertheless remained in the upper end of its range suggesting that EZ growth has slowed but not stopped.
Perhaps more worthy of note was the hotter than expected growth in M3 money supply which expanded at 11.7% versus consensus calls of 11%. The double digit growth in money supply figures – today’s reading registered the highest rate of growth this decade – must be a serious concern to European monetary authorities. Unchecked, the rapid expansion in money aggregates is likely to stoke inflation in the 13 member region. Although few market participants expect the ECB to hike rates next week the pressure to tighten rates in October will mount if M3 figures continue to expand at this record pace.
Boris Schlossberg is a Senior Currency Strategist at FXCM.
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