ECB monthly econ statement today | German influence in the Eurozone

Today is Eurozone day, when Mario Draghi, Chairman of the ECB makes its monthly statement and holds his press conference. The accent today will be on inflation, or the lack of it. The ECB has a horror of deflation, and the fact that the rate is now running at an official 0.7% when they would like it to be close to 2% is a real cause for concern.

Readers who have been paying attention will have noticed that we might have given the impression of suffering a little from a sense of cognitive dissonance in relation to the Euro versus the US dollar (EURUSD) rate. The Euro shows little or no sign of weakness, despite normally depressing developments in the Eurozone. These, coupled with the expectation of eventual tapering of US Quantitative Easing (QE) should, in theory, be sending the EURUSD exchange rate steadily lower, but it is not. This expectation should have been raised by the ADP employment report yesterday, which showed in excess of 200k new jobs in the US, and is a leading indicator of a good Non Farm Payrolls report tomorrow (Friday).

At the end of October Eurostat, the EU statistics bureau, reported that inflation in the Euro zone was at its lowest for four years. The Euro accordingly lost value but has been regaining it ever since. On 7^th November there was a surprise ECB rate cut (surprising to the market, but not to us). Again, the Euro took a dive, only to retrace all of it in short order. Then, on November 20^th, a rumour of possible negative EU overnight interest rates also had the expected reaction, only for this too, to be reversed.

So, what is happening?

We believe the answer lies in Germany, and in what can be termed instructive developments in Switzerland. For some time now, other global powers have been calling on the German monetary and fiscal authorities to rein in the German trade surplus. This is reckoned to be damaging not only to the rest of the Eurozone but also to other exporting nations, in particular the USA. The Germans, for their part, insist that their success in this area is due to quality product and high efficiency, rather than to price or other manipulation.

So where do the Swiss fit into this scenario? Well, Switzerland enjoys, along with Germany, a reputation for manufacturing excellence along with the most stable of national economic management. This led to rise in the value of the Swiss franc which was so strong that the authorities there felt it necessary to place a cap on the value of their currency unit against the Euro. This stands at 1.20 francs to the Euro and there is every indication that if the Swiss Central Bank were not intervening in the market, the franc would be a lot stronger than it is and Swiss exports would suffer accordingly.

Prior to the establishment of the Euro, this would have been the fate of the German currency also. We believe that now, Germany is the driver of the EU economy and many investors, quite simply, see the Euro as nothing more or less than a proxy for the old Deutschmark.

Is this too simplistic, or is there more to it?

Other currencies

The AUDUSD continues to trend strongly downward. Any retraces in this pair will be carefully watched for entry opportunities.

Gold has risen a little and might just be getting ready for the possibility of a new short trade.

We have closed our NZDUSD trade, at break-even. This one was not performing and is now a little higher (it was a short trade) than our entry position. The trending that brought us into this trade has disappeared. When the reason a trade was entered is no longer present, it is time to ruthlessly cut the position.

The trade that is current at present is the short in AUDNZD. We have taken off half the position at the first profit level and the rest of the trade has more profit locked in by the Stop Loss order. There is a retrace under way at present but no indication that the dominant downward trend has changed.

USDJPY has entered a countertrend. We will not try to take advantage of this on the way down, but will watch for a discontinuation of this countertrend to take another long position in due course.