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EZ Leaders Eat Lunch

Last updated 6/22/2012 12:17 PM EST (GMT -5) 0 Comments - Add your comment

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Neal Gilbert

Technical Analyst, GFT

Follow @FXexaminer

It has been a quiet morning fundamentally in the market with only Canadian CPI coming in a bit under expectations at 1.8% versus 1.9% expected. Most attention is being paid to the meeting of the minds in Europe where the leaders of Germany, France, Italy, and Spain have convened to discuss the EZ situation. Before they could get to their press conference though, the ECB issued an encouraging statement, stating that they have decided to provide additional methods to improve banking sector access. As far as I can tell, the intended effect is to make it easier for people, businesses, banks, etc. to borrow money by utilizing collateral that wasn’t available to use before today. That ease in borrowing will encourage more investment, putting more money in to the overall market instead of sitting in a bank account making little to no interest. With increased investments come economic growth, and a pathway to exit their current economic strife. Whether this actually works as intended or just leads to more bad loans and, in turn, more bailouts will be closely watched. In the interim, it doesn’t appear that the EUR/USD is impressed as it is selling off any gains merited from that announcement.

Meanwhile, the Euro leaders stepped up to the microphone after their get together and said, well, not much. They repeated all the talking points that they have been hammering at every meeting in Europe, and I believe they probably ate some lunch. Much like when going on a date, going out to lunch most likely doesn’t lead to anything substantial. Italy, Spain, and France would like to make the union stronger by introducing an EZ wide FDIC-like banking guarantee. Currently each country has its own version. They would also like to bring a Eurobond in to existence, which would allow the struggling economies in Europe (Italy and Spain included) to borrow money on the back of German faith and credit. Currently, Italy and Spain are struggling with keeping their borrowing rates down due to the fact that investors feel they are going to default on their promise to pay back those loans. If these countries can borrow money based on a bond that is backed by the entire EU, the faith that it will be paid back increases, and borrowing rates drop.

Germany on the other hand doesn’t really benefit from either of these situations beyond the fact that the euro could survive. Since Germany is the largest and most powerful country in the EZ, they would be counted upon as the savior in bad situations. It’s almost like when you bought your first car, and your parents had to co-sign the loan. If you couldn’t pay your loan, your parents were on the hook. The only benefit that your parents get out of that situation is that you could get a job, drive to it, and survive as an adult, keeping the family intact. Unfortunately, Germany is playing the role of a hard line parent who would rather their child suffer the consequences of a bad decision instead of doing all that is available to help them out. The pressure is mounting for Germany though as even the IMF’s Christine Lagarde has joined the chorus of critics saying that Germany needs to be less of a hard line parent, and save the “family.”

The rest of the day will most likely be slightly risk positive as traders position themselves or take profit heading in to the weekend. If you are looking to keep trades open over the weekend, keep in mind that the markets do sometimes move substantially due to major announcements or world events that cause a gap from Friday’s close to Sunday’s open. Be sure to manage your risk appropriately to anticipate those types of events by either closing your open positions or paring them back.

For more intraday analysis and trade ideas, follow me on twitter ( @FXexaminer ) and/or Facebook (FX Examiner) and attend our daily Live Market Analysis webinars. Visit your local GFT website under “Getting Started” to sign up.   I was also recently interviewed for The Trader’s Podcast, a two part interview which can be heard here and here .

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About The Author

Neal Gilbert, an avid follower of the markets, began working at GFT in 2006, educating new and experienced traders in an easy-to-understand manner. His focus has been teaching common technical indicators, risk management, and sharing his favourite trading strategies. His Braving the Rapids strategy guide can be found on GFT’s website.

Neal conducts live webinars throughout the day, including his” Long and Short of It,” which is a Fundamental Live Market Analysis webinar centred on key economic releases. He also conducts webinars in Basic and Advanced Technical Indicators, Volatility and Risk Management, Trader’s Edge, and Fibonacci Trading and Theory.