Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Fed's Twist, ECB's Turn, Euro Shouts

Currencies / Euro Sep 22, 2011 - 08:58 AM GMT

By: Ashraf_Laidi

Currencies

Best Financial Markets Analysis ArticleThe FOMC has done what was expected via Operation Twist; buying the same amount of Treasuries ($400 bln) as much it will sell, thereby maintaining the size of its balance sheet at $2.87 trillion. This explains today's jump in USD. And the fact that the Fed stayed away from cutting interest rate on overnight reserves is another positive for USD & negative for equity indices.


Most market observers were correct in expecting Operation Twist rather than outright QE3. It was highly unlikely for the Fed to adopt an aggressive easing less than 1 week after delivering coordinated USD injection operations with the major central banks. These central banks need to preserve armory for more troubled times ahead (later this year). For now, they will tackle the yield curve and worry later about raising net expansion of liquidity into the system.

We repetitively mentioned to our Premium subscribers that the Feds twist operation will be USD-positive as long as it constitutes no increase in the Feds balance sheet. We mentioned this at the September 8 interview on BNN

EURUSD Cycles & Policy Divergence

Monetary policy dynamics between the ECB and Fed have largely driven EURUSD cycles over the past 5 years. Each upcycle in EURUSD was boosted by Fed easing and relative ECB hawkishness. (see chart below on the right) The Operation Twist will be inadequately dovish to weigh on USD. Especially negative for the euro is the ECB's ensuing switch into easing mode via asset purchases and the eventual cut in its refi rate.

Germany's Looming Contraction (Yes, Germany)

Germany's Looming Contraction

The justifications for a lower euro have been primarily focused on a looming default of Greece, inadequate size of the EFSF and Italy's unsustainable debt situation. But Tuesday's release of Germanys ZEW investor survey signals that the Eurozone's largest economy is at risk of a looming economic contraction. The ZEW's Current Situation index for September fell below 50 for the first time since June 2010 (a time when Eurozone was dragged by the Greece/Spain/Portugal downgrades), while the economic Expectations Index deteriorated to its lowest since December 2008.

The chart above clearly illustrates that a contraction (sub-50) in the ZEW current situation index (red) has led to a contraction in both of Germany's services and manufacturing PMIs (lower chart). This time it should be no different. As Germany's economic dynamics worsen, they will force the ECB into more activist easing, with an emphasis on boosting growth, while relegating inflation priorities to statistical records.

Trichet Confirmed ECB Shift Ahead of Fed's Twist

The ECB side of the ECB/Fed rate divergence is already emerging. In an Tuesday interview with Spain's Expansion, Trichet described the recent shift in the ECB's economic outlook as "significant", confirming that growth risks are to the downside and inflation risks are broadly balanced. While the comments are no surprise considering this months ECB press conference (which emphasized growth concerns), they highlight the current process of ECB dovishness, which serves to offset the negative USD impact of the Fed's moves into further asset purchases.

EUR-USD Libor Spread to Extend Decline Despite CenBank Injections

EUR-USD Libor Spread to Extend Decline Despite CenBank Injections

In our September 14 note to clients we argued: "The cost of USD funding as measured by USD 3-month LIBOR hits 0.347%, its highest level since August 2010. USD-3-month LIBOR has risen by over 40% in 2 months (was 0.25% in July), a pace not seen since spring of 2010 when euro fell 22% against the US currency. As Eurozone banks rush into raising USD funding to alleviate the unfolding liquidity crunch, the cost of USD funding will further increase, thereby boosting USD. This has now reduced the Euro-USD LIBOR spread to a 3-month low".

1 day later, the central banks of the US, Eurozone, Japan, England and Switzerland injected USD-creating liquidity facilities for those European banks encountering difficulty borrowing in USD.

The EUR-USD spread shall continue to deteriorate and EURUSD is set to extend its path towards our preliminary target of $1.29 (mentioned last week) in light of evolving fundamental and technical dynamics. $1.29 is seen well before year-end, followed by $1.18 in late Q1 2012.

Get your free 1-week trial to our Premium Intermarket Insights on FX, commodities & equity indices.

For more frequent FX & Commodity calls & analysis, follow me on Twitter Twitter.com/alaidi

By Ashraf Laidi
AshrafLaidi.com

Ashraf Laidi CEO of Intermarket Strategy and is the author of "Currency Trading and Intermarket Analysis: How to Profit from the Shifting Currents in Global Markets" Wiley Trading.

This publication is intended to be used for information purposes only and does not constitute investment advice.

Copyright © 2011 Ashraf Laidi

Ashraf Laidi Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in