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The ECB Press Conference: Bank Decides To Initiate Open Market Bond Operations

Written by A Forex View From Afar on Thursday, May 07, 2009

• The Governing Council decided to reduce the interest rate on the main refinancing operations of the Euro-system by a further 25 basis points and the rate on the marginal lending facility by 50 basis points, to 1.00% and 1.75% respectively.
• Current key ECB interest rates are appropriate taking into account all available information and analysis
• The ECB will conduct liquidity-providing longer-term refinancing operations with a maturity of 12 months
• The operations will be conducted as fixed rate tender procedures with full allotment […] the fixed rate may include a premium to the rate on the main refinancing operations, depending on the circumstances at the time.
• The Governing Council has decided in principle that the Euro-system will purchase euro-denominated covered bonds issued in the euro area
• Furthermore, the Governing Council has decided that the European Investment Bank will become an eligible counterparty in the Euro-system’s monetary policy operations
• These decisions have been taken to promote the ongoing decline in money market term rates, to encourage banks to maintain and expand their lending to clients, to help to improve market liquidity in important segments of the private debt security market, and to ease funding conditions for banks and enterprises.
• Today’s decisions take into account the expectation that price developments will continue to be dampened by the substantial past fall in commodity prices
• The latest economic data and survey information suggest tentative signs of a stabilization at very low levels, after a first quarter which was significantly weaker than expected
• The world economy, including the euro area, is still undergoing a severe downturn, with the prospect of both external and domestic demand remaining very weak over 2009 before gradually recovering in the course of 2010
• This weakening in the first quarter appears to have been significantly more pronounced than projected in March
• On the downside, there are concerns that the turmoil in financial markets could have a stronger impact on the real economy, as well as that protectionist pressures could intensify
• At the same time, there may be stronger than anticipated positive effects due to the decrease in commodity prices and to the policy measures taken.
• The decline in inflation since last summer primarily reflects the sharp fall in global commodity prices over this period.
• Signs of a more broad-based reduction in inflationary pressure are increasingly emerging.
• We expect to see headline annual inflation rates declining further and temporarily remaining at negative levels for some months around mid-year.[…] short-term dynamics are, however, not relevant from a monetary policy perspective
• The latest data confirm the continued deceleration in the pace of underlying monetary expansion
• Month-on-month developments in M3 and its components have remained volatile, with data for March showing a contraction in most of the respective outstanding amounts
• The outstanding amount of MFI loans to the private sector contracted further in March, reflecting mainly a negative flow of lending to non-financial corporations
• All in all, since the intensification of the financial crisis in September 2008, the Euro-system has taken a series of measures that are unprecedented in nature, scope and timing.
• We have observed a clear decline in key money market interest rates that euro area banks typically use as benchmarks to reset floating rate loans and price new short-term loans
• Monetary policy has provided ongoing support for households and corporations.
The Governing Council decided to intervene in the Euro-area’s bond market. The European Central Bank will buy up to 60 billion of covered bonds, which are financial securities backed by the cash flows from mortgages. To some extend, covered versions are the European version of the ABS instruments, only much safer. Mr. Trichet also mentioned that the intervention in the covered bond is not a quantitative easing program, but an “enhance credit support program”.

Additionally, the Council members decided that the European Investment Bank will be able to bid in the bank’s open market operations. This means that the ECB will open its doors to government debt instruments, something that was out the bank’s reach until now. The bank also decided to increase the open market operations’ maturity up to 12 months, which can be use by banks to strengthen their balance sheets and unload most of their toxic assets.

TheLFB-Forex.com notes that the euro traded very volatile during the press conference. In the first 15 minutes, the euro plunged 90 pips and recovered everything back. The single-currency gained 150 pips and almost touched the 200-day moving average during the press conference as Mr. Trichet said that he cannot exclude lower rates, but the current one are appropriate.

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What To Expect From The ECB And BoE

Written by A Forex View From Afar on Wednesday, May 06, 2009

The currency market is anxiously awaiting the interest rate decisions from the Bank of England and the European Central Bank, which will be released tomorrow morning. The BoE is expected to keep rates on hold and say that it will continue the asset buying program, while the ECB is expected to reduce the key interest rate by 25 basis points.

Additionally, market participants anticipate that the ECB will introduce a new quantitative method, even though the market is still not sure exactly how, since the ECB cannot intervene in the government bond market as the other central banks do. Instead, the ECB members have repeatedly said that the bank is already adopting a quantitative easing method by providing unlimited funds to the European banking system. Most market participants do not consider this to be a quantitative easing method.

Over the past few weeks, a number of ECB members expressed their opinion that the lowest threshold in the Euro-area should be 1%, and anything lower would simply disrupt the inter-banking lending. If Mr. Trichet expresses this opinion tomorrow, the euro may receive a boost, TheLFB-Forex.com Trade Team said. They also added that this might substantially improve the euro’s outlook over the medium and long term, if the recent positive global economic news reports are added to the equation.

On the other hand, it seems that the BoE has already reached the limits of monetary policy. The bank has limited room to further reduce the interest rate, if any, as the voting members saw strong deflationary pressure that threatened to “undershoot” the inflation target.

However, TheLFB-Forex.com Trade Team notes that in the November inflation report, the BoE forecast the CPI read to stand somewhere slightly above the 1% benchmark level, but the inflation gauge was release at 2.9% in March, and even rose a few basis points in February. Some analysts are arguing that the BoE decision was oversized, something that might cause strong inflationary pressures over the medium to long term, and will support the pound’s value.

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The Libor Rate Falls Below 1%, A Record Low

Written by A Forex View From Afar on Wednesday, May 06, 2009

The three month dollar Libor rate fell to 0.99% this morning, breaking, for the first time, below the 1% benchmark rate. Libor or London Interbank Offered Rate tracks the interest rate at which banks borrow unsecured funds from the money markets. Currently, it is estimated that roughly more than $350 trillion worth of loans worldwide are linked to the Libor rate.

The Libor rate saw a strong uptrend in the first phase of the credit crunch, as the uncertainty regarding the health of the financial system was reflected in the money market rates. The Libor rate peaked at 4.818% in November, but the decision taken by the Fed and the other central banks helped alleviate the inter-banking strains. In particular, the main factors that influenced the Libor rates were the Fed’s decision to offer dollar swaps with the other major central banks and pledge to sustain the balance sheets of any other falling banks, so the Lehman situation will not be repeated.

TheLFB-Forex.com Trade Team notes that the timing is even more interesting, since today the market expected the stress test results. “According to the latest rumors, ten out of the 19 banks tested will be asked to increase their capital base, something that should have had a negative effect on the market, but so far it has not”, TheLFB-Forex.com Trade Team said.

Having the Libor rate drop to a record low level, more optimism is being injected into the equity markets. The main indexes from the U.S. and Europe erased the declines seen in the first two months of the year, helped by optimism that the global contraction is slowing down. The record low Libor rate should further strengthen the case, since it helps businesses and consumers’ access credit and liquidity with more ease, something that was not the case over the last year.

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Analysis Of Monday's Trading Session

Written by A Forex View From Afar on Monday, May 04, 2009

The currency market again saw a day of dollar selling on Monday, but the majors posted only modest gains against the Japanese yen, if any.” The main reason might be the closed Japanese trading session, which reduced significantly the liquidity of the Japanese yen in the foreign exchange market”, TheLFB-Forex.com Trade Team noted. Consequently, the Usd/Yen traded in a 25-pip channel during the overnight session, which eventually gave way as the yen plunged towards the support area formed by the 20 and the 200-day simple moving averages.

The Asian session saw the major pairs gain ground, but the London open reversed the trend and sent the pairs below the Sunday open price. The dollar was again sold shortly before the U.S. open, as the market expected the recent positive news to continue with today’s pending home sales and construction spending reports. The market expectations were overwhelmed when both releases printed better than the expected numbers.

Having the major pairs break above important price points of the last six months of trading it starting to look like the currency market is pricing in a gradual recovery of the global economy. However, both the dollar index and the financial markets will have a big test coming in the following periods, as three central banks are expected to announce interest rate decisions this week plus the results of the banks stress test.

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The Story Of The First Quarter GDP

Written by A Forex View From Afar on Thursday, April 30, 2009

The GDP report revealed a story of two tales, one in which consumers are the main character and has a happy ending and another where businesses came to the spotlight, but does not have the same happy ending.

The quarterly data showed a surprising 2.2% up-tick in consumer spending, something that indicates that consumer expenditures, which account for two thirds of the economy, remain resilient. At the same time, inventories dropped at a record $103.7 billion annual rate last quarter, which had a major negative influence over the nominal GDP numbers.

“If we take into account that consumer spending rose in the first quarter despite the tight credit conditions, and that business’ shed almost all the available stocks, we may see some positive surprises in the second quarter” TheLFB-Forex.com Trade Team said.

However, despite all the recent positive news, the economy kept contracting at a very strong pace making the current recession the worst in the last half of century. The business side of the economy shows a rather weaker picture, the GDP report points out.

“Business fixed investments plunged 37.8% in the first quarter, the most on record, while nonresidential and residential construction saw a double-digit plunge. Moreover, companies cut expenses on equipment, software and construction projects at a 38% annualized rate,” TheLFB-Forex.com Trade Team said.

“These numbers show the weakness of the corporate environment, which is struggling to survive,” TheLFB-Forex.com Trade Team noted. “Most likely, corporate bankruptcies are heading toward a record this year,” they said.

The GDP numbers are still weak, and do not show a substantial improvement from the previous quarter. However, the financial markets focused mainly on the unexpected rise in consumer spending. It will be interesting to see how spending will evolve in the coming period, giving that unemployment is still rising at a very fast rate, credit markets are still tight and most importantly, the U.S. savings rate is at very low levels.

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The Challenges Of The PPIP Program

Written by A Forex View From Afar on Thursday, April 30, 2009

The Treasury might have scored a big victory recently, since the Public-Private Investment Program, or PPIP, drew bids from more than 100 fund managers. The PPIP program plans to attract private investors that are able to raise more than $500 million in capital to bid for the “illiquid” assets.

“Most likely, some of these potential buyers will be rejected by the Treasury’s term and conditions. However, the remainder would still be able to create a sizable market for the distressed assets,” TheLFB-Forex.com Trade Team said. “By having such a big number of possible bidders, the Treasury might come up with a more realistic price for the toxic assets, one that would also encourage the banks to sell them,” they added.

“The timing may be very good, if all the recent positive news continues in the coming period. If the fund managers perceive that the economy is recovering, they may place some very high bids for the banks’ assets, as theoretically their value will recover with the economy,” TheLFB-Forex.com Trade Team said. “The only problem would be, in this case, to convince banks to let their assets go, and write-down additional losses.”

On the other hand, the main condition for this to happen is that investors must think the economy is bottoming at the time the toxic-assets auction process starts. If not, bids may be lacking, especially at the first auctions, something that might have a negative impact over the entire program.

Additional problems could come from the fact that the recent changes in the market-to-market accounting rules turned many (if not all) of these toxic assets into winners, since now banks can value illiquid assets using their own models. The question that rises now is why would a bank actually want to write-down a loss (the difference between the book value of the asset and the auction’s price) and more specifically, sell it when the bank can be certain that at some point in time the asset will recover its original value?

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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.

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