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ECB - No More Limitless Liquidity

Last updated 11/5/2009 9:35 AM ET (GMT -5) 2 Comments

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Boris Schlossberg

Director of Currency Research, GFT

The EUR/USD spiked through the 1.4900 figure after ECB President Jean Claude Trichet stated that some extraordinary monetary measures will be curtailed in a orderly fashion as credit conditions in the Eurozone begin to return to normal. The slightly more hawkish stance  of the ECB chief surprised the market which expected only a repeat of the same rhetoric Mr. Trichet offered for the past several months.

In providing the central banks assessment of the current economic conditions Mr. Trichet went through a familiar litany of subjects noting that growth has improved but will remain subdued and inflation expectations remain well anchored.   However, it was the casual reference to the future removal of liquidity measures, most notably the central banks covered bond program and unlimited loan facility that caught the markets ear, driving yields on German 10 year bonds higher by 5 basis points while pushing the euro through the 1.4900 handle.

The ECB appears to be generally unconcerned for now about the elevated exchange rate of the euro dollar. Mr. Trichet did express his support for a strong dollar and made his standard reference to the fact that the central bank does not want to see excessive volatility in the currency markets, but made no further comment as to euro’s s recent strength. 

Mr. Trichet did acknowledge that consumer demand in the Eurozone remains weak as evidence by the disappointing EZ Retail Sales which fell by -0.7% in September, prompting him to note that he remains “prudent” in his outlook.

Overall, the tone of today’s press conference suggests that ECB feels that economic conditions in the EZ area  have stabilized but growth remains subdued and therefore the present monetary policy remains “appropriate”. However, unlike their North American colleagues, European monetary authorities clearly view  the issue of price stability to be equally as important as that of economic growth and are therefore more likely to act faster to tighten monetary conditions than the Fed.

Today’s positive news on the US labor front with jobless claims dropping a significant -20K to 512K versus 522k expected has provided further support for the risk trade at the start of the North American session. However, focus will soon turn to tomorrow’s NFP data which will need to surprise to the upside  as well in order to further the rally in high beta FX. If Non Farm payrolls do print better than expected the rally in EUR/USD could take the pair through the 1.5000 level as the markets become more reassured of the recovery’s durability. For now currency markets are likely to consolidate and take their cue from equity flows.

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Comments (2)

ozen

November 05, 2009 at 10:13 AM ET

Boris, don't you think that the Trichet statement may have push EurUsd lower in view of his support for a strong dollar.
i think the initial spike may have been as a reult of positive number from jobless claim?

bschlossberg

November 05, 2009 at 10:15 AM ET

No the strong dollar is just standard rhetoric. The fact that they are thinking of lifting the 12 month tender is teh real news and that's euro bullish

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.