Thursday, October 02, 2008


London Interbank Offered R ate

The definition is very simple, where banks are willing to lend money to each other. The reality is that a tremendous amount of loans are fixed using these rates everyday but currently little to no lending is going on at all. The rates which are set at 11:00am London time daily are sky rocketing. Moving interest rate differentials from discount to premium and in most cases tremendous premiums.

Let's take an example of the Euro ag the Dollar. In normal markets o/n dollar rates should be about 2.00%, the Euro 4.00%. This means that by being long Euro ag Usd you would earn (on the differential) on a daily basis (4.00% ag paying 2% for dollars.) In the current market where everyone is scrambling for dollars the Euro continues to trade at about 4.00% but dollars are trading at 8-10%. This now enables you to earn on te differential by being short Euro/Usd.

The LIBOR fixes are not even really representative of where the markets are. They are being fixed way below where any financial institution is willing to lend dollars. This really needs to be fixed to get the market moving again. If Banks are not willing to lend to each other, to consumers and to small businesses then the economy will crumble. You think things are bad now, I truly believe this is nothing compared to what can happen.


I am thinking that the Euro might begin to be a buy sometime real soon. If (when) this package goes through it will mean alot more supply of Treasuries in the market. I think this will lead to a severe steepening of the U.S. interest rate curve as well as and increase in inflation and a weakening dollar. This is more of me thinking longer term. I went home last night long small Euro. No real reason and it was probably ill timed if the Senate approves the Bailout Bill, but over the next few weeks I think there is a strong possibility for the market to move the Euro higher.

Good Luck and Good Currency Trading.

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Anonymous Anonymous said...

Mmh, I don't know... a) financials' turmoil spreading to Europe and Chinese authorities seemingly willing to take on the bulk of the T-bonds due to be issued should provide a good support to USD in the weeks ahead; b) in the short term, an easing in the fiscal policy might well prove to support the currency via higher domestic rates, and that's also a positive for USD. In the long run it's obviously a whole different matter... c) how longer can BoE and ECB go on without cutting rates when their banks are crumbling? d) US are seen as being much ahead of the curve while dealing with the current crisis when compared to Euroland.

Read you later, AT

8:10 AM  
Blogger Banker said...

ECB leaves rates unchanged, but futures are building in 50bp down the road. Market clearly thinks you are correct. The markets suffered as they feel that the house may not pass the bill plus all the "pork" thrown in. AND the economy is in big trouble. Wow we do have problems.

Be Lucky


6:05 PM  
Anonymous Anonymous said...

Yep, confusion is great under the sky... Anyway, I'm only a paper trader and sleep well at night:)

By the way, great call your shorting EUR on Septmber 26th... you seem to be doing fine.


6:29 AM  

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