Will the ECB's Stubborn Streak Deal a Fatal Blow to the EMU

Joined : 23 Dec 2007 Posts : 239 Location : Nigeria

Today's commentary is by Jack Crooks, Editor of World Currency Options and President of Black Swan Capital.

Good Day Currency Traders!

This morning I did a Google search for two words, first ‘Bernanke' and then ‘Trichet.' The Federal Reserve chairman's namesake returned 3.25 million results. The European Central Bank (ECB) president returned only 1.4 million.

Apparently, a beleaguered dollar, surging commodity prices and a struggling economy have made Mr. Bernanke quite popular. As a living and acting symbol of the Federal Reserve, Ben Bernanke has been the subject of numerous articles that touch upon the outlook for the U.S. economy.

Certainly Bernanke feels the pressure every day. Now my question is: Are we going to see the Google search numbers for Trichet start to increase?

An article citing remarks from one of Trichet's ECB colleagues casts shadows on the European economy. The potential for a Eurozone downturn tugs at this ECB head hauncho's mind. It also calls his recent interest rate decision into question. But my concern goes beyond the ECB interest rate policy. It goes to the heart of European Monetary Union (EMU) as a viable framework.

I have long wondered what would happen to the euro when it finally faced a real test, i.e. a downswing in the business cycle. Such a test could now be underway.

Hmmm! We get the distinct impression we are inching, or possibly lurching, closer to some type of showdown on ECB monetary policy as pain spreads among the member states.

The euro is still the major dollar alternative in the mind of Mr. Market. And that view won't necessarily turn on a dime. But as Mr. Ferguson says, history offers few examples of monetary unions succeeding.

Stay tuned, and keep an eye on the number of Google search results returned for ‘Trichet.' More Trichet "hits" could mean the central bank president has even more pressure to cut back interest rates. It also means that Mr. Market may think the EMU is, in reality, a deeply flawed experiment.

Jack Crooks, Editor of
World Currency Options

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Making 'Cents' of the Headlines
The Dollar Catches a Break!

From our Currency Director: Sean Hyman

What Happened:

Several factors have started working for the buck all at once lately. And they all started hitting on all cylinders yesterday. Oil went down from a new all time high of US$100 a barrel to under US$90 within the last nine trading sessions. Gold fell from a new all-time high of US$916 an ounce, down as low as US$877 with two days. That's a fall of nearly US$50 in two days.

Since oil and gold tend to trade inversely to the dollar, this aided the dollar's recent rise. However, the biggest facet was the "rabbit" that the ECB "pulled out of its hat" yesterday.

European Central Bank's Mersch came out and stated that "downside risks" were a concern. Formerly, all they talked about was "fighting inflation" and now they dropped this bomb on the market. They are now concerned about an economic downturn in the Eurozone's economic growth.

How the Markets Reacted:

This surprise forced the EUR/USD to drop a whopping 230 pips in about three hours. Needless to say, it was a "shocker" to the markets and that's why traders reacted as they did.

ECB Spooks the EUR/USD

What I Say:

The ECB could have done this "strategically" because the ECB is not known for shocking the markets. However, I know the ECB president, Trichet and his colleagues hate the EUR/USD exchange rate being near 1.5000. It's putting a death grip on the Eurozone's export sector. So the ECB men may have strategically planned this.

Formerly, traders thought the ECB would raise interest rates one more time. Now, traders have to consider the possibility of a rate cut. Wow, what a difference a few days make. This may be enough to take the wind out of the sails of EUR/USD. I know the U.S. dollar sure liked that surprise. The greenback got a breath of fresh air as the EUR/USD pair sank.

Traders selling the EUR/USD also caused a "spillover" effect onto EUR/JPY. The euro selling pressure unwound this carry-trade even further (like it needed help unwinding in the first place).

Now that the ECB's "cat is out of the bag," the U.S. Fed can lower interest rates and it may not sink the dollar as much as it would have formerly before this information was known.

Right now the futures market is pricing in a 100% chance that the Fed will cut by 50 basis points this time. So we'll see (on the 30th) if the market gets it right.

As these Sovereign Wealth Funds continue to come in and "save the day" for American corporations, it will also add support for the beaten down buck.

Like I mentioned weeks ago, the dollar is now gaining support on many fronts, so you can still expect that dollar rally coming later in 2008.

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