With the start of the session today, currencies benefited from the optimism which extended from yesterday's trading to the session today, where yesterday the strong economic data from the United States and Germany in addition to the successful Spanish bond sale spread optimism in the market and supported the sentiment to improve, yet optimism didn't last as the European Central Bank offered more than expected loans for the euro-area banks.
The euro rebounded to the upside after the European Central Bank provided the euro-area banks today with 3-year loans, in attempts to provide liquidity to the market and prevent a credit crunch and an interbank lending freeze from hurting the financial sector, yet markets reversed then to the downside after investors started to weigh the consequences of the movement taken by the major bank.
The Bank offered euro-area banks 489 billion euros of 3-year loans, more than median estimate of 293 billion euros -Bloomberg News survey-.
The Bank also explained after the auction that 523 banks applied to obtain funds, where cheap funds attracted more than expected banks to apply for loans, especially when the loans will be lend at the average of the Bank's benchmark of 1.0% over the period until the loans mature.
The question to be asked here is why ECB loans witnessed strong demand? And the answer will be that cheap funds attracted struggling and strong banks to acquire funds since loans will be lent at the average of the Bank's benchmark of 1.0%.
The other question to be asked is why banks apply for additional funds? Honestly, we cannot track the use of those funds, but several options are seen on the table, where banks could use the extra fund in carry trades, and in result benefiting from the differences in yields, or banks could strengthen their financial positions in order to meet the Tier 1 capital requirements and finally unfortunately some banks could apply for additional fund only because they are cheap, noting that some banks don't use those funds only in their balance sheets.
The EUR/USD pair opened the session today at $1.3079, and rebounded then to the upside reaching the highest at $1.3196; however, the pair reversed to the downside after European Central Bank movement to currently trade at $1.3040 after recording the lowest at $1.3036.
On the other hand, the U.S. dollar index (USDIX) opened the session today at 79.83, and reversed to the downside as optimism dominated the market, which in result boosted demand for high yielding investments and reflected negative demand for the low yielding safe havens. The index reached a low of 79.23, but then rebounded to the upside reaching the highest at 80.04, while it is trading now around 80.02.