14th January ECB and Euro overview
14th January 2010
Currency Overview
Focus on ECB policy decision and the Euro/USD
Today sees the release of the ECB policy decision and the usual press conference. The press conference holds the key in terms of possible volatility in the Euro currency, especially with the major focus being on the rapidly deteriorating situation in Greece, with regards to its public sector debt and the countries credit rating.
Thoughts from the trading floor
Today we expect the ECB to keep rates on hold at 1.00%, and it is expected that the ECB will keep the same policy stance as last month, described as “appropriate” (in Trichet’s press conference). At the last meeting the ECB upgraded their view of the economy, and said they see an “improvement” in economic activity. The ECB see risks to growth and inflation as “balanced”, and describe medium term inflationary pressure as “low”. They expect short-term disinflationary pressures to turn positive in the coming months, and remain “moderately positive” over the policy horizon.
Last month, the ECB decided to end the 6-Month Refinancing tender on the 31st March 2010. The 12-Month Refinancing tender operations have ended. The cessation of these operations is seen as simply an unwinding of the “extraordinary” measures that the ECB put into place to counter the shocks to the financial system in late 2008. Trichet, as he did during the November meeting, was keen to stress that this policy action was not intended to signal any changes to broader monetary policy. They had stated previously, in November, that “not all our liquidity measures will be needed to the same extent as the past”, and that “extraordinary measures will be phased out in a timely manner”. From this we can conclude that any major changes to policy at this meeting could come as further unwinding of the “extraordinary” (emergency) measures. However, again, should this occur, Trichet will be keen to stress that they do not intend to change market expectations of EONIA rates (EONIA is currently around 0.325%).
The major focus of the press conference today will almost certainly hang around the situation in Greece. Yesterday saw fresh widening in the Bund vs. Greece bond spreads as the situation there has deteriorated rapidly over the last 6 weeks. As we stand currently, the ECB relaxed their eligibility standards for collateral to BBB- during the credit crunch, as part of their package of “extraordinary measures”. Although this measure is set to expire at the end of 2010, Greece is now only 2 notches away from the BBB- rating. As most members of the ECB governing council believe that other Euro Zone members should not step in to aid the Greeks with their public debt problems, it is unlikely that the Greeks will get much sympathy from the ECB. Any strong comments made regarding to the situation in Greece has the likelihood of causing a large reaction in the markets, and thus Trichet will have to phrase the answers to any questions asked very carefully.
With regards to the ongoing issue of the strength of the trade weighted Euro, it is highly unlikely that Trichet will make a strong statement, and will maintain his current view that disorderly FX volatility is undesirable.
Bull View
The weakness seen in the USD, since the start of this month, against the major currency pairs other than the Euro reflects the concern over the public sector debt situation in a number of European countries such as Greece, Portugal, Spain and Ireland. Should Trichet make comments to ease some of these fears, we could see the Euro rally strongly to come back into line with where the USD is trading against those other currency pairs- i.e. rally. Bulls will need to make a firm break above the key 1.4600 handle, aiming to test the 1.4800 handle over the short-term to force short positions out of the market.
Bear view
The bears will cite the rapidly deteriorating situation in Greece as a long term issue that will help subdue the Euro over the medium term horizon. They will see any potential intervention by other Euro Zone members or by the ECB as setting a bad precedent, which will hurt sentiment in the Euro. They will need to force the market below the crucial 1.4300 handle to help the resumption of the bearish trend in the Euro seen over the last month.
Futex View
We favour the bears. We believe that the Euro Zone members states are stuck between the, proverbial, “rock and a hard place”. Leaving the Greeks to resolve their own issues has caused negative sentiment in the Euro. At the same time taking unprecedented steps to intervene to aid the Greeks may cast a doubt over the medium to longer term future of the Euro Zone.
