Thursday, October 7, 2010

Quiet Before the Strom

Interest Rate Day 2 will reign central banking policy among us in less then 4.5 hours.  The first such decision emanate from the Bank of England at 7:00 EST.   Jean-Claude Trichet's ECB is on deck and will step to the plate 45 minutes later.  In the mean time, let us examine the potential ramifications that hinge on the tongues of the notorious 'Lords of Finance.'

Is there any any legitimate doubt the ECB will keep rates in check? No doubt here.  I volunteer to take the opposite side of that trade.  Maybe Mr. Kerviel will humor me.  The issue in question more or less is whether or not Mr. Trichet will touch on the bleek Irish banking system, lack of deposits held by Spain's Cajas, Greek austerity, or effects of a stronger Euro on medium-term growth.

The ECB statement will most likely sidestep Ireland's dire banking sector and potential liquidity problems in Spanish financial institutions.  ECB rhetoric on the aforementioned issues will trickel out in various policy speeches and interviews.  Now let us savor the meet and potatoes.  Surely, we can assume the words 'growth' and 'inflation' are seared throughout the policy statement.  The 'Lord' will reaffirm that the European economic recovery continues on the forecasted track bolstered by 'robust' (there's that word again) economies (Germny, ahem).  Next, Trichet will unwrap the 'PIIGS' with hyperbole that includes restructuring, budget rebalancing, and structural change.  Lastly, the spotlight will surround inflation.  I surmise The ECB will not attribute lack of inflation to a stronger Euro but rather pent up demand.  At this point the Germans will be thrown praise for their growth through domestic demand.

All of this banter is pure speculation.  However, what I attempt to underline is the ECB's 'poker face'.  Time and again the ECB protects the Euro-Zone through tight-lips.  When Lip-service is provided the market bites.  Let us recall how long it took Wall Street to buy a coordinated bailout between The Fed and U.S. Treasury.  The ECB/IMF bailout of sovereigns slowed the bleeding immediately.  What am I getting at?  The ECB can move markets just as fast if not faster as than the next central bank.

May 6 - July 6, EUR/USD rate rebounded in 2 months

On a more speculative thought, I am intrigued to see the Dollar Index touching 'Armageddon Support'.  Could Non-farm Payrolls provide the impetus for a rigorous dollar rally?  I expect to see 76 on the above index before a bottom becomes apparent.  Though, I will keep the 'Armageddon Support' in mind over the next few trading sessions regardless of Quantitative Easing round 2.  At present, $ 1 Trillion seems to already be priced in.  

This next  chart  is of the Dollar Index.  Here I look for 'highs' as a an indicator of risk aversion or more simply put, a fear gauge.

What will come of Rate Day 2?  I am not a forecaster, only a lowly speculator.  However If I were a betting man I would put my faith in the Euro currency for the next few sessions.  Good luck trading!

-Patrick M. Ambrus

Sources:,, Financial Times,,

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