Thursday July 7, 2005 - 02:53:13 GMT
Share This Story
Foreign Exchange Analytics - www.fxa.com
ECB - No Monetary Policy By Osmosis
Okay few think that a rate cut in Sweden and a drift to a cut in the UK is sure sign that ECB will be following with cut of its own. But price action in euro/dlr since the Riksbank cut a half suggests traders are willing to bet on monetary policy by osmosis...look at euribor.
And this line of reasoning (ECB cutting soon) requires suspending any notion that what ECB officials say publicly is not a reflection of what the ECB is thinking privately. From Trichet to Liebscher, ECB officials have been near unanimous on the belief that ECB rates are at historic lows and not a barrier to growth. Cutting would do little to encourage more consumption and investment. Trichet will surely restate the Bank's opposition to easing in his monthly press conference Thursday. That said Trichet and the ECB do not live in caves or suffer from price stability tunnel vision. They have stopped considering a rate hike for the time being. While not terribly significant, Buba's Reckers said earlier today that he not only thought a rate change was not in the cards this summer but was not a likelihood until the summer of 2006 (and he is surely thinking rate hike).
Trichet will undoubtedly beat the structural reform drum Thursday. The problem is few in the Eurogroup are listening (as Blair is finding out too) and those that are dare not bite the bullet and move to liberalize labor and capital markets much less curb agricultural subsidies. Trichet will argue that easing from here risks pushing on a string and in the odd event that the economy gains momentum, checking inflation ahead would be more problematic. Still Trichet is unlikely to rule anything out or anything in
on Thursday, including a rate cut. But regardless of what happens with rates outside the Euro Zone, the ECB is no closer to a cut simply because the Riksbank has cut and some at the BoE voted for one (interesting to see how many more join Charlie Bean Thursday in voting for a BoE cut now that Marian Bell who voted to ease in June with Bean has left the MPC).
Trichet and the ECB will also not ignore the falling euro as an easing in monetary conditions and on top of 100-year low in German bund yields and post-war low in short-term rates, policy is expansive. Why do more and risk pushing on a string? Markets would quickly assume a liquidity trap and policy would be even less effective.
Even so if Trichet makes a case against a rate cut it is no reason to expect a major euro bounce anytime soon. A steady ECB against a steadily tightening Fed is still a key driver in the move down and this condition won't change for at least another 3-4 FOMC meetings. No the only way the euro finds a basis for a decent bounce is in the US structural story rearing its head (nearly off the radar screen currently) or the US economy is hit by an unanticipated shock like bursting in the housing market bubble, an oil-led decline in consumption or a trade war with China.
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."