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Is the ECB Getting Ready to Save the World?

Last updated 11/18/2011 9:15 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

Friday is finally here and the rumors are flying.   The euro surged following reports that there could be a deal between the ECB and the IMF to provide support to fiscally troubled nations that would sidestep the need to for an EU Treaty change.   However earlier this morning, there was also a repors that the central bank could announce a weekly cap to their sovereign bond purchases and unfortunately these two unconfirmed stories have diametrically opposite implications for the euro.   Based on the short squeeze in the currency, which has held onto its gains since the rumor of the ECB/IMF deal broke, traders are desperate for good news and this is one of the very few proposals that could actually work if not for opposition from the Germans.   Both the ECB and Germany, who holds the purse strings do not want to give countries like Italy money through the IMF but they may not have a choice if the crisis in Italy deepens.   The benefit of going through the IMF is that Germany would avoid a public bailout of Italy but at the end of the day, she will still be asking their own citizens to pay for someone else’s troubles and every single German newspaper has said that this won’t happen.  

Everyone has been looking to the ECB to save the world but a weekly cap on bond purchases would confirm that the central bank has no plans to take the next step of printing money to increase their bond purchases.   Representatives of more fiscally sound countries have voiced strong opposition to the bond purchase program and a limit basically shoots down the idea of debt monetization.   If the market knows that the ECB has a limit to their bond purchases, they will use that to their advantage and start attacking bonds once the limit is met which would be terrible news for the euro.  

In other words, one story puts the ECB as the market’s savior and the other puts more handcuffs on their support for the bond markets.   We probably won’t know which one is true for a few more weeks but the message from the ECB has been consistently clear – they do not want to take a larger role in the bailout. For this reason, we continue believe that the short-squeeze in the euro will be short-lived because there is no easy way out of the crisis.   

U.S. leading indicators are scheduled for release at 10:00 AM ET.   This along with any comments from Federal Reserve officials will remain nothing more than a sideshow to Europe. 

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.