A Forex View From Afar

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Forex Analysis

How Low Will The ECB Go?

Written by A Forex View From Afar on Sunday, April 12, 2009

After cutting interest rates less than expected at the last meeting, the European Central Bank’s leading members appear to be giving a clear signal over what the bank should do next.

In the latest interview, the governor of the Austrian central bank Ewald Nowotny said that the key interest rate should not go below the 1% level. This statement backs what other key ECB members have said over the past few weeks. Among them, the Vice-President of the European Central Bank said that the key interest rate could move somewhat lower, but in a “measured way”. Additionally, Axel Weber, which leads the Bundesbank, said that 1% is his personal bottom line.

Putting the pieces together, it appears that the ECB does not want to cut below 1%, even though the bank adopted a number of quantitative policy measures. “Despite having a much higher interest rate than the Fed, the money market rates in Europe are lower then in the U.S., and this gives the ECB more space to maneuver.” TheLFB-Forex.com Trade Team added.

“If the ECB decides not go any lower than 1% and MR. Trichet or any other of the voting members makes this official, the euro may find very strong support.” TheLFB-Forex.com Trade Team added. “The single currency might strengthen not only against the dollar, but against a whole range of currencies, especially against the pound” they said. “However, this would also have a side-effect, since the euro will gain ground against the Eastern European currencies, which are ready to sink in a pool of foreign denominated debt.”

TheLFB-Forex.com Trade Team notes “Since every other major central bank reached the lower limit of the monetary policy, the ECB policy measures are more important than ever for the euro’s valuation.” Keep an eye on what the ECB members are saying, you never know when the euro might take off”.

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BOJ Monetary Policy Meeting Produces Nothing New

Written by A Forex View From Afar on Tuesday, April 07, 2009

The Bank of Japan policy meeting came and went, but nothing substantial really happened. The bank decided to maintain the overnight call rate at 0.10% - the lowest among the industrialized world – while it expanded, once again, its accepted collateral.

“The yen plunged 80 pips ahead of the interest rate decision, but this was most likely a serial correlation move, since it was seen in the other major pairs too”, TheLFB-Forex.com Trade Team said. “The BoJ’s interest rate meetings are really non-events that fail to move to market” they added.

The decision to accept, as eligible collateral, municipal and government bonds will help small and medium banks by increasing their liquidity. This comes after the BoJ began widening its collateral base recently, to facilitate Japanese banks in order to provide credit lines for the business holders and consumers.

TheLFB-Forex.com Trade Team notes, “The Japanese economy is in a bad shape. Some private forecasts point to the economy contracting up to 5% this year, as exports continue to plunge and internal demand slows. Furthermore, the economy is susceptible to external pressure, since exports make up a big percentage of the economy. The correlation between the Japanese GDP and its export market one quarter earlier approached 70% over the last decade.”

Today, TheLFB-Forex.com Trade Plan paid 80 pips on the yen, in a trade that started during the early Asian session and ended during the mid-European session.

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U.K. Economy Under More Pressure

Written by A Forex View From Afar on Monday, April 06, 2009

The pound starts the week underperforming the major currencies, after failing to break above the 1.4950 resistance level. The pair failed two other tests in January and February, the present one being the third in-line. In the mean time, the pound’s decline triggered the TheLFB-Forex.com Trade Plan short numbers, gaining traders 100 pips with practically no draw-down.

During Monday’s session, the pound plunged 0.96%, considerably more than the other major pairs. The pound rose 0.8% during the Asian session, but these gains were easily reversed during the U.S. session, as the market re-entered in a risk-aversion mode. Currently, the pound has formed a bearish engulfing pattern on the daily chart, as it bounced off the 1.4950 swing area.

The pound’s decline comes as a number of voices were raised about the U.K.’s ability to fund its budget deficit. According to the latest forecasts, the U.K. government might be facing a 10% deficit this year, the biggest among the developed countries. To make things worse, the Institute for Fiscal Studies said that the government will have to raise the income tax by 8 percent, to bring the government budget to a more normal stance by 2015-2016, something that is very unlikely to happen. Previously, the BoE governor, Mervyn King, also complained about the poor state of the U.K.’s borrowing market.

TheLFB-Forex.com Trade Team notes that the BoE will be forced to intervene in the primary bond market, by buying gilts unsold to private investors. This will embark the BoE on a true quantitative easing policy, unlike the current policy that now involves only buying corporate bonds. “On the medium to long term, most likely, the pound will be a certain victim of the huge U.K. deficit, since the central bank will have to print money to bring the yields down” TheLFB-Forex.com Trade Team said. “The U.K. economy and pound will suffer even more if the global downturn intensifies, since it will force the government to borrow more”

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The Press Conference Bullet Points And Analysis

Written by A Forex View From Afar on Thursday, April 02, 2009

• The Governing Council decided to reduce the key ECB interest rates by a further 25 basis points
• Today’s decision takes into account the expectation that price pressures will remain subdued
• The latest economic data and survey information confirm that the world economy, including the euro area, is undergoing a severe downturn
• Economic activity has weakened markedly in the euro area, as domestic demand has contracted in parallel with the downturn in the world economy
• Available data and survey indicators suggest that economic activity in the euro area has remained very weak in early 2009. It is likely to remain very subdued for the remainder of the year
• There may be stronger than anticipated positive effects due to the decrease in commodity prices and to policy measures taken
• On the other hand, there are concerns that the turmoil in financial markets could have a stronger impact on the real economy
• Annual HICP inflation has fallen further, from 1.2% in February to 0.6% in March
• The decline in inflation since last summer primarily reflects the sharp fall in global commodity prices over this period
• We expect to see headline annual inflation rates declining further in the coming months and temporarily reaching negative levels around mid-year. Such short-term movements are, however, not relevant from a monetary policy perspective.
• Annual HICP inflation is expected to remain below 2% in 2010
• Available indicators of inflation expectations over the medium to longer term remain firmly anchored
• The latest data confirm the high month-to-month volatility of developments in M3 and its components observed since the intensification of the financial turmoil
• The pace of monetary expansion in the euro area has continued to decelerate markedly
• Developments within M3 clearly reflect market participants’ specific investment responses to the intensification of the financial turmoil
• The flow of MFI loans to non-financial corporations and households has remained very subdued
• The decline in short-term lending may be indicative of a reduction in loan demand related to the weakening of economic activity.
• Regarding fiscal policies, it is necessary that countries’ commitments to a path of consolidation in order to return to sound fiscal positions are credible, respecting fully the provisions of the Stability and Growth Pact
• This is essential to maintain the public’s trust in the sustainability of public finances, which is important both for the economy to recover and for supporting long-term growth
• Many countries will need to specify further credible consolidation measures for 2010 and beyond


The questions and answers section took off with Mr. Trichet appearing very casual and relax, speaking about the future monetary policies. The Chairman of the ECB said that the present 1.25% is not the floor and does not exclude sending the key interest rate any lower.

At the same time, Mr. Trichet outlined that the deposit rate, which is currently sitting at the 0.25% will not be reduced any more. This implies that the monetary channel between the three main interest rates (deposit, key and lending) will shrink at the following meetings. Even though it did not explicit specify the decision that backed the 0.25% interest rate, Mr. Trichet said that the decision was taken unanimously.

Unlike at the other press conference, Mr. Trichet referred to the Fed, by saying that the money rates in the Euro-area are lower than in the U.S., despite the interest rate spread. Mr. Trichet also said that currently, the ECB’s balance sheet is larger than the Fed’s when compared with the GDP size. Most likely, these comments came as the ECB received strong criticism for not doing more to fight the credit crisis.

Most market participants expected the ECB to announce a new quantitative easing policy today, probably a possible intervention in the corporate debt market. However, Mr. Trichet said that full details would be disclosed at the next meeting, which will be held in 7 May. Additionally, Mr. Trichet put a lot of empathy on the fact that the bank is already in a non-standard method, being the first central bank that adopted quantitative easing methods by providing unlimited funds to banks.

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What To Expect Tomorrow From The ECB

Written by A Forex View From Afar on Wednesday, April 01, 2009

Tomorrow, the market expects the ECB to reduce the Minimum Bid Rate by 50 basis points, down to 1%. Since the current rate cut cycle has begun, the ECB reduced the key interest rate by 275 points or 325 basis points if tomorrow’s projections come true.

Additionally, most market commentators have said that tomorrow the ECB will announce a new quantitative easing plan, to buy corporate debt. This assumption came after Mr. Lucas Papademos suggested such a move may come from the European Central Bank, echoing Mr. Trichet, which said at the last press conference that the bank is judging to implement new “unconventional measures”.

If the ECB will adopt this measure, to intervene in the corporate debt market, the euro might get some strong support. Until now, the ECB is the only major central bank that did not directly adopt a quantitative easing method, even though Mr. Trichet said that the bank actually may in the future.

The Chairman of the ECB referred to the measures to provide unlimited liquidity to the banking system from the Euro-area, instead of doing auctions, and in the same time increase the assets that it receives as collateral.

On a slightly different note, a Bloomberg report shows that the ECB might start buying Eastern European currencies, like the Polish zloty and the Romanian Leu, to help the regional economies recover faster. Over the last two quarters, or so, the local currencies’ plunge had been a real threat for the region’s economy. In case of a possible intervention, the ECB might avert a possible crisis in the region, something similar to what happened in 1998 in Asia.

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Ukraine and the Impossible Trinity

Written by A Forex View From Afar on Wednesday, April 01, 2009

Ukraine announced it will impose strict rules on the capital movement, while also forcing banks to quote the national currency, the hryvnia no lower than a limit set by policy makers.

These moves are meant to stop or at least to reduce the strong capital outflow that threatens the Ukrainian economy, as is the case with most other emerging economies. However, this also drives the country near to a default scenario.

Over the last few months, the hryvnia has lost almost 40% of its value against the dollar, as investors turned the inflows looking for a higher yield, into outflows looking for nothing more than safety. The National Bank of Ukraine lost one third of its reserves during this period, as it tried to curb the currency’s decline.

What the Ukraine is currently trying to impose, strict capital flows, is certainly not what investor’s want to see or hear. Additionally, the country is running through a “small” political crisis, being lead by a President that is pro-Europe, while the government is pro-Russia, something that has the potential to disrupt the country’s fragile stability (if it has not done so already). Along with the current political struggle, the Ukraine now faces another problem, called the impossible trinity.

During the early 1980s, when the foundation of an open economy was being laid, economists developed the so-called impossible trinity model, which states that a country cannot control its monetary policy, its currency and its capital movements simultaneously. In order to function properly, a country has to give up to one of the three.

However, this is exactly what the Ukraine is trying to achieve these days. Until now, the Ukraine controlled its monetary policy and had a free, tradable, currency, as most open economies do. However, now it will also control its currency and its capital flows, trying to achieve something that no other country has achieved for the long term.

In a normal open economy, as investors pull money out of the country, the local currency depreciates, until a certain point when it is not profitable (or justifiable) to depreciate the local currency. Because the Ukraine will keep the hryvnia at artificial high rates, it will create an incentive to draw more money from the country, until the point when the government runs out of funds. Secondly, by keeping the currency rate at an artificial level, it makes the exporter’s life harder, while encouraging imports, expanding the trade deficit.

In this case, I have the impression that the Ukraine is heading towards a very hard social and economic crisis, which will ultimately end up as a political crisis. This comes, after the rather fragile economy passed through a similar situation in 2004. The impossible trinity is among the few economic concepts that have never failed, until now, and the history of economic crises reminds us of that.

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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.

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