Any of you who are market oriented no doubt are all over the news of central bank coordinated liquidity efforts. This is from the Federal Reserve’s announcement:
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.
These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.
As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant.
I’m not certain this changes things as much as markets assume. The ECB is ultimately responsible for creating euros. I’m not certain how much of a policy stance this move represents. If the ECB is committed to “printing”, then why the need to turn to other central banks for a coordinated effort?
In fact, what would help the Eurozone most is a MUCH cheaper euro, since the only way out of their fundamental problem (that of Germany running big trade deficits with periphery countries, but no longer wanting to fund the trade deficits that result) is by cheapening the euro greatly, so that Germany runs big trade surpluses with non-Euro countries, and the rest of Europe has more or less balanced trade. And the euro, which was not cheap, has rallied strongly today, amped up due to the 17 year high level of shorts outstanding.
The open question is whether this increases confidence enough to get major European countries through critical bond auctions, not just this week, but most important, a series of major refundings Italy has in February.