Rising EURIBOR and EUR 3-month LIBOR are primarily negative for the euro at times when eroding interbank confidence leads to a shortage of US dollars in the global monetary system, to the extent of boosting USD-denominated LIBOR. But thats not been the case over the past 6 weeks. While EUR 3-month libor has risen by more than 20-bps since the peak of the sovereign crisis in early June, USD 3-month LIBOR fell by nearly 15-bps during the same period. Weak US data, FOMC economic downgrades and broadening Fed dovishness have accelerated the decline in USD-libor. Consequently, the chart below shows the EUR-USD 3-month libor spread (EUR minus USD as indicated by red graph) to have risen to its highest level since January, closely followed by a rising euro.
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Just Like in October 2009
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The steepness of the EUR-USD libor spread is instrumental in boosting EURUSD, in a manner that is highly similar to Q3-Q4 2009 (left circle) when USD-libor fell below its Japanese counterpart for the first time.That was the time when markets allowed for the possibility of fresh QE in the US. As is the case today, the Federal Reserve was the only major central bank most likely to add on to its existing asset purchases, while the BoE had ended its QE program and the ECB standing pat. The result was a broad decline in the US dollar, coupled with rising equities and soaring energy and metal prices.
A 200-day MA unlike any other
The US dollars decline made the headline today when the USD index hit 80.59, falling below its 200-day moving average for the first time since late January. The importance of such a decline will only be highlighted once the break of the 200-day MA lasts into mid-month. But theres something notable about todays development. It is the first time in the life of the euro that the USD index breaks below its 200-day MA, without EURUSD breaking above its own 200-day MA. The chart below shows EURUSD stands at $1.3230, which is about 3 cents below its 200-day MA.