Divyang Shah, Senior IFR Strategist
As a refresher the seven-day deposits from the ECB are the funds it drains in relation to the now wound-down SMP, but still in need of sterilisation. The percentage allocated at the marginal rate was 28.6% leaving the average allotted rate at 0.18%.
The elevated level of the marginal rate, coupled with ECB borrowing, highlights the extent to which money currently in the market is a little more than tight.
Banks holding back on liquidity would explain why money market rates have moved up so sharply since the FOMC meeting last week. With the cost of funding positions going up it might explain why players have been so eager to take positions off their books.
The extremes in the money markets could be over judging as evidenced by the move higher on Euribor and short-sterling contracts.
But one day does not make a trend, especially as Tuesday’s are usually called “turnaround Tuesday” for a reason.
More soothing price action in the money markets should allow for relief for other asset markets even if things will remain volatile as markets focus on timing of QE tapering from the Fed and risks related to the PBOC’s tough-love approach to liquidity for its banks.
