Tuesday February 5, 2008 - 13:12:05 GMT
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Black Swan Capital - www.blackswantrading.com
Big Question Mark in Euro Land
FX Trading â€“ Big Question Marks in Euro Land
The markets were relatively quiet yesterday after a week of vicious price action. The equities markets finished decently lower, but it was a steady period of selling and not all that eventful. Currencies stood mostly unchanged from where they stood prior to Wednesdayâ€™s interest rate announcement.
The calmness to start the week likely stemmed from the digestion of Federal Reserve rate cuts and introduction of a fiscal stimulus plan. And thereâ€™s not nearly as much hype surrounding this week as there was last week. But central banks around the globe will be meeting to discuss and announcement changes to monetary policy. The Reserve Bank of Australia announced overnight that it will boost rates by 25 basis points. The reaction by the Australian dollar has been mixed as traders weigh a sluggish report on Australian retail sales.
The European Central Bank had been expected to hold rates unchanged this week, while the Bank of England is expected to slice another 25 basis points off its benchmark rate. But news out overnight may stir up expectations for the ECB to behave a little differently.
A couple weeks ago the financial world had Europe under a microscope. They wanted to know just how vulnerable the region was to a slowdown in the U.S., the second-largest destination for European exports. Now theyâ€™re finding out.
An index measuring Europeâ€™s service industry expanded at its slowest pace in the last four years. Should this be cause for concern? Absolutely. Itâ€™s one piece of the puzzle that will eventually show if the ECB will need to become more accommodative with monetary policy. Thus far ECB President Jean-Claude Trichet has said the central bank remains vigilant towards fighting inflation and will not lower interest rates.
Weâ€™ll see how he acts once heâ€™s slammed with dismal data and peer pressure â€“ much the same way Ben Bernanke has been. And by watching how the euro behaves we should get a pretty clear view of what traders expect from Europeâ€™s central bank.
In the U.S. weâ€™ll see mostly a mix of earnings reports for the rest of this week, some of which could give us a glimpse into the state of the U.S. consumer. Insight into the consumer should help us figure out if the worst is really over and rate cuts will cut through the clouds to blue skies. If, however, we begin to notice a weakening trend in consumer spending that could seal the deal on recession.
As far as weâ€™re concerned, tough times are still here and itâ€™ll be a couple months before the economy might turn upward. And who knows, maybe Europe is just getting started down the same path.
EURUSD 240-min swan dive this morning!
[Chart not available in text format]
John Ross Crooks III
Black Swan Capital
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