A Forex View From Afar

A Trader's Look At A Trader's Life

Forex Analysis

Sentiment Shifting At The ECB

Written by A Forex View From Afar on Sunday, December 14, 2008

The money markets in the Euro-area are currently experiencing a rather unusual event. The EONIA rate or the reference rate in the Euro-area is trading above the ECB’s target of 2.75% for the first time in the last few months.

Furthermore, the EONIA swap contracts, which practically gauge the prime bank’s sentiment over future interest rates, show a humped yield curve, indicating that the market is shifting its view. This comes after the EONIA swap market had a reverse yield curve, which usually indicates that the market expects that the ECB will carry on reducing interest rates.

The most important thing that happens these days in the EONIA swap market is that the spreads between the short-term and the long-term maturity dates are converging, confirming that the market expects the ECB to alter its rate cut cycle. As seen in the attached chart, the spread between the 2 year maturity date and the 1 week has almost approached zero, while it was trading at -0.8 a few weeks ago. The big swing in the European money-markets happened around the same time, subsequent to Mr. Trichet’s speech held one week ago.

ECB interest rate expectations

At the same time, it looks like the currency market has had a similar shift. On the day Mr. Trichet held the usual press conference, the euro managed to find a bottom against the dollar and then gained approximately 600 pips, to reach the highest value for the last two months on Thursday.

The change in sentiment regarding the future ECB interest rate can be a plausible cause for the strong gains the euro posted lately. On Thursday, for example, the euro advanced a strong number of pips, despite U.S. futures running into the red. On negative equity markets, the low yielding currencies, like the dollar and the yen strengthen, however, this was not the case for the dollar. Today, it was the first time in the last few months when the euro advanced on negative U.S. futures. Also, the euro might have been helped by the extremely low yields on the U.S. Treasury notes.

Related Posts by Categories

  1. 0 comments: Responses to “ Sentiment Shifting At The ECB ”

TheLFB Team & The View From Afar Blog

© 2008 A Forex View From a far Trading Blog

Trade Desk View

Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

Want to subscribe?

Subscribe in a reader.