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European Central Bank Policy Shift Carries Broader Implications
Written by article default Friday, 09 September 2011 09:48
- Fallout from ECB rate decision has broader implications
- Markets looking for coordinated stimulus response
- Euro approaching critical support level
- Commodity bloc and emerging market FX at risk going forward
Most of the market reaction over the past several hours has been in response to the fallout from the European Central Bank rate decision in which President Trichet outlined a more intensified fear of the Eurozone economy and the need for the central bank to keep things on the accommodative side. One of the key take aways from Mr. Trichet and company was that inflation risks were balanced and no longer to the upside. The language clearly added weight on the Euro with the market easily settling below 1.4000 in response, and paving the way for a generally downbeat sentiment into Friday. Talk of global monetary accommodation in the face of a struggling macro economy gained traction as market participants speculated of the possibility for some form of coordinated stimulus at the upcoming G7 meeting.
Technically, the key level to watch in the Euro now comes in by 1.3835 which represents the July base. If this level is taken out then we could very well see an acceleration of declines which ultimately exposes a drop all the way back down towards the 1.2000 area over the coming weeks and months. A closer look at the longer-term Euro chart since the 2008 record highs shows the market moving in a downtrend and potentially on the verge of carving out the next major lower top. The rapid deterioration in the Eurozone supports this outlook on the fundamental front, and we contend that any attempts to offer some form of a soft landing in the region will still prove to be a tough task as the local markets are forced to battle far too many demons which include; bailouts on the peripheral, a troubled banking sector, political turmoil, and threat of downgrade.
On the strategy front, we continue to recommend looking for opportunities to build into long US Dollar positions. The current market environment is definitively risk averse and should only continue to promote additional safe haven buying. With the Swiss Franc no longer a viable option and the Yen hardly being classified as risk free, we see the US Dollar emerging as the prime beneficiary of these flows in the currency markets. There have been those that have distorted perceptions of safe haven alternatives by shifting into higher yielding and emerging market plays, but we feel this strategy will soon prove to be quite painful as themes of instability and uncertainty eventually expose these markets for what they really are……risk correlated assets that will fall victim to liquidation on a further decline in the global economy. The idea of hiding in the Australian Dollar is one such example where the lure of yield will likely be severely offset on the reality that the deluge of global economic and financial market deterioration will soon initiate a third phase and extend from Europe into the Asian and emerging markets.
ECONOMIC CALENDAR
Written by Joel Kruger, Technical Currency Strategist
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