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GlassOnion

Central Bank Watch

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I mostly trade technicals. Don't know much about Central Banks, But here's what I am watching for a long term position.

 

 

It is more or less accepted that at the next rate announcement RBZ is going to raise it's rate.

RBA on the other hand might lower theirs. I am looking to short the AUS/NZD. Looking for parity.

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There are a number of Eurozone economic reports scheduled for release this week including the German ZEW surveys and Flash PMIs. If there is any surprise weakness in Eurozone data, the sell-off in EUR could drive EUR/JPY below 140, which is a very important support level. We know that ECB President Draghi is concerned about the outlook for the Eurozone economy. The last time they met, they made no mention of the improvements in Germany. If 140 is broken, there is no major support until the 138 handle.

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There are a number of Eurozone economic reports scheduled for release this week including the German ZEW surveys and Flash PMIs. If there is any surprise weakness in Eurozone data, the sell-off in EUR could drive EUR/JPY below 140, which is a very important support level. We know that ECB President Draghi is concerned about the outlook for the Eurozone economy. The last time they met, they made no mention of the improvements in Germany. If 140 is broken, there is no major support until the 138 handle.

 

well, if you happened to watch data out of Europe lately, you would know it came better than expectations......so euro lower is a dream under these conditions

 

TW

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In the midst of Friday's market confusion, the Fed will meet next week and provide guidance for the unwashed masses. A sideline feature of this meeting will be Chairman Bernanke passing the leadership baton to Lady Yellen. The market's worry is the future rate of reduction of bond buying known as QE3.

 

A more important issue might be the negative results of the zero interest policies. An ample supply of free money turns an army of savers into speculators. An interesting article by Charles Hugh Smith is a good read:

 

 

"The elimination of low-risk interest income in favor of risky speculative credit/asset bubbles has led to a monumental misallocation of capital and the institutionalization of perverse and highly corrosive incentives".

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Inflation has been trending lower recently. That's one of the reasons they didn't taper as much on the last meeting. It will be interesting to see what happens. I'm pretty sure you know that the Fed doesn't use the CPI measure to measure inflation, but I'm going to add some information here for others reading this thread.

 

The Fed often emphasizes the price inflation measure for personal consumption expenditures (PCE), produced by the Department of Commerce, largely because the PCE index covers a wide range of household spending. (source: FRB: What is inflation and how does the Federal Reserve evaluate changes in the rate of inflation?)

 

Also, see trimmed mean PCE, an alternative inflation measure used by the Dallas Fed: The Trimmed Mean PCE inflation rate is an alternative measure of core inflation in the price index for personal consumption expenditures (PCE). It is calculated by staff at the Dallas Fed, using data from the Bureau of Economic Analysis (BEA). (source: Trimmed Mean PCE Inflation Rate - Dallas Fed)

 

From the last link you can also see the 1MO, 6MO and 1Y figures. Obviously there's no threat of immediate inflation pressure.

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Here is an interesting article about Euro zone if you are long on EU

http://www.bloomberg.com/news/2014-01-27/euro-jobless-record-seen-in-legacy-of-italians-giving-up.html

Euro Jobless Record Not Whole Story as Italians Give Up

 

Situation Worse

The euro area’s official unemployment rate includes only those who actively sought work in the previous four weeks and are available to start within the next two weeks. The labor underutilization rate compiled by Bloomberg using Eurostat data for the third quarter includes the official unemployed as well as those willing to work who have given up looking for a job or are not immediately available.

Among euro-zone countries, Italy has the largest group of potential workers who don’t appear on official unemployment statistics. The gap between the country’s labor underutilization rate, encompassing people between the ages of 15 and 74, and its unemployment rate is more than twice that of Spain and more than five times that of Greece.

“The situation in the region, and in Italy in particular, is certainly worse than it seems at first glance,” Raffaella Tenconi, an economist at Bank of America Merrill Lynch in London, said by telephone. “This is particularly evident when you look at youth unemployment and participation rates.”

In Di Gilio’s home province of Naples the local youth unemployment rate in 2012 was 53.6 percent compared to a national average of 35.3 percent.

 

 

Euro at 1.30 Pound at 1.55 that's my bias and I could be wrong but facts are bleak on Euro zone

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Ammeo,

 

Here in the States we know the unrest in the Ukraine began when the President canceled an EU trade deal. I havn't been able to find out much about the nature, size, or scope of the canceled deal. Do you think it will have any impact on the EU economy ?

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Both the Fed and the ECB have embraced near zero interest rates all be it Draghi resisted because of the German restraint. The Fed, compared to the ECB, has been far more aggressive in increasing the money a supply. Through quantitative easing the Fed has supplied bankers and friends there of, an abundance of cash, for successfully inflating the value of certain assets. Then the momentum players join the party and the additional cash injection creates demand for the asset de jour.

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Today the RBNZ backed away from committing to a rate hike at the next meeting in March while the Fed stood firm and tapered another 10 Billion maintaining its tightening stance. That suggests that risk currencies such as the kiwi may be in for a correction as trader temper their expectations. It is no surprise why RBNZ held back today. With EM crisis exploding and its currency still at very high levels the last thing the New Zealand monetary authorities want to do is push the unit even higher. Meanwhile cable has been holding up very well and despite repeated dovish commentary from Governor Carney, the market is convinced that the BoE will raise rates ahead of the Fed.

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Bundesbank Would Favor End of ECB Sterilization -- Source

 

Move Would Boost Liquidity in Banking System

 

FRANKFURT—Germany's Bundesbank would favor an end to the European Central Bank's policy of withdrawing significant amounts of money from the banking system to offset its government-bond holdings, a person familiar with the matter said.

Such a move, which would have the effect of boosting liquidity in the banking system, would be aimed at smoothing out recent volatility in money markets, the person said.

Under an ECB bond plan known as the Securities Markets Program, the central bank committed to withdrawing funds from the banking system in amounts equal to what it accumulated in government bonds of Greece, Ireland, Portugal, Spain and Italy. The ECB bought more than €200 billion ($271 billion) in these bonds under the facility from 2010 to 2012. Each week, it drains funds by offering financial institutions interest-bearing deposits, a process known as sterilization.

It is unclear whether there is a consensus on the ECB to end the policy, the person said. The ECB meets on Thursday. In December, ECB President Mario Draghi said the ECB was "reflecting" on the issue.

Sterilization helps to keep the money supply stable, and the policy also shields the ECB from criticism that it has used its balance sheet to monetize government debt.

But the strategy has led to some concerns in financial markets that the ECB is creating additional volatility in short-term money markets by reducing the amount of liquidity in the banking system. By ending the sterilization, the ECB would increase the amount of surplus funds that banks trade with each other, the person familiar with the matter said, anchoring short-term interest rates.

The central bank has been unsuccessful in recent weeks in draining the full amount of their remaining government bond holdings. In the latest week, banks deposited just over €150 billion with the ECB under the sterilization program, €26 billion short of its target.

 

 

Bundesbank Would Favor End of ECB Sterilization - WSJ.com

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Ammeo,

 

Here in the States we know the unrest in the Ukraine began when the President canceled an EU trade deal. I havn't been able to find out much about the nature, size, or scope of the canceled deal. Do you think it will have any impact on the EU economy ?

 

A trade deal would have been much better for strengthening EU's books.

President Viktor Yanukovych seemed to have other plans but they backfired.

Russian President Vladimir Putin assuring Ukrainians that Russia would honour a loan deal whatever government emerges in Kiev so at least Ukraine has some backing.

 

 

Russia's deal on the table seems much solid which shows EU alone cant even match the might of Russia head to head leaving a very bad and weak image of EU.

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The situation in Italy is most acute. Italy has the third largest amount of sovereign debt in the world, and the ECB auditors are coming for a visit. A recent Reuters story commented of the situation:

 

"Italian banks are near saturation point after two years spent frantically buying their own government's bonds, forcing the Treasury to find alternative investors at home and abroad to finance a 2-trillion euro debt.

 

Lenders' ability to soak up yet more Italian sovereign debt depends largely on the European Central Bank - which in turn says Italy is crucial to the fate of the entire euro zone."

 

But with the Bundesbank in control of the EU money supply, we must get ready for another crises in the ongoing euro drama.

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In the past 24 hours, GBP/JPY experienced the steepest losses. Due to a more than 0.75% decline in the GBP/USD and 0.9% decline in USD/JPY, GBP/JPY dropped approximately 1.75% to its lowest level since November. The pressure created by the weaker than expected manufacturing data from U.S. and U.K. was exacerbated by risk aversion. When the markets open in Asia and investors in that part of the world see that U.S. stocks fell more than 2%, we expect further weakness in GBP/JPY. Although there were pockets of strength in both the U.S. and U.K. manufacturing reports, GBP/JPY will have a very difficult time recovering without a turnaround in risk appetite. Unfortunately there’s no major U.K. or U.S. economic reports scheduled for release tomorrow that could help. As a result, we expect further losses in GBP/JPY and if this week’s data releases continue to miss their mark, the currency pair could drop below 161 and head towards 160.

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With the European Central Bank meeting coming up in a bit, EUR is in play. EUR/JPY in particular has been confined within a narrow 200 pip range for the past 3 days between 136 and 138, making the currency pair prime for a breakout. Central bank rate decisions are the perfect catalyst for big moves even if the ECB does not change interest rates. Every month the head of the ECB delivers a press conference where he provides his latest economic and monetary policy outlooks. Mario Draghi’s comments almost always move the euro as traders express their enthusiasm or disappointment with the central bank’s views. EUR/JPY’s reaction to Draghi will depend on whether he acknowledges the recent economic improvements in the economy or ignores them again. Having only strengthened their forward guidance last month, the central bank will be wary of sounding overly optimistic and risk driving rates higher. The odds favor EUR/JPY negative comments from the ECB but most market participants expect the central bank to be dovish so any hint of optimism could send EUR/JPY sharply higher.

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German court parks tank on ECB lawn, kills OMT bond rescue - Telegraph

 

“The Court considers the OMT decision incompatible with primary law,”

 

"...complicates any future recourse to quantitative easing if needed to head off Japanese-style deflation."

 

“This is a massive attack on Europe’s rescue strategy. I do not know whether the markets have understood this yet,” said Clemens Fuest, head of Germany’s ZEW Institute.

 

“I don’t think the ECB can activate the programme as long as the case remains open at the European Court,”

 

“They taken away the ECB’s weaponry, and greatly increased the hurdle for QE. The ECB won’t be able to respond as another wave of deflation"

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For the first time ever, Janet Yellen will be making the trip up Capitol Hill to testify on the economy and monetary policy. While market participants will be waiting with bated breath to hear what the new Fed Chairman has to say, one of her primary goals will be to minimize the market’s reaction to her comments. Maintaining low volatility is a top priority for a central banker especially when it is her first time on the podium and this is why we expect Yellen to say as much as possible tomorrow, but reveal very little. Members of Congress will have a long list of questions for her but investors are only concerned with three:

1. Is She Worried About Muted Job Growth?

2. What Will She do with Forward Guidance?

3. Is Taper on a Preset Course?

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For the first time ever, Janet Yellen will be making the trip up Capitol Hill to testify on the economy and monetary policy. While market participants will be waiting with bated breath to hear what the new Fed Chairman has to say, one of her primary goals will be to minimize the market’s reaction to her comments. Maintaining low volatility is a top priority for a central banker especially when it is her first time on the podium and this is why we expect Yellen to say as much as possible tomorrow, but reveal very little. Members of Congress will have a long list of questions for her but investors are only concerned with three:

1. Is She Worried About Muted Job Growth?

2. What Will She do with Forward Guidance?

3. Is Taper on a Preset Course?

 

that is definitely bringing some volatility, regardless if central bankers don't want that :)

 

TW

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The Abe recovery plan has been criticized for the ever increasing deficit spending combined with the lack of government revenue. Commencing in April the sales tax will increase from 5 to 8%. While retail activity ahead of the tax increase will be brisk, the government is fearful economic growth in the 2nd quarter will falter.

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