TheLFB-Forex.com
Trade Desk Thoughts:
The ECB Q.E. Boat Finds Dry Land
Long Eur/Usd potential (subject to FOMC noise at 14:15 EST)
The major central banks embarked a the quantitative easing (QE) program during the credit crisis, launching a boat that was full of Usd liquidity and short-term local currency loans that were designed to instigate commercial bank lending. Signals are coming that the QE boat may have found dry land, and the dismemberment begins.
The question now is which region will be the first to leave the program completely, because that is the currency that will find buyers first.
The first to make the jump was the ECB (outside of Australia that seemed to doge the QE bullet) on Wednesday when they held the last of their 12-month refinancing operations. While the usual approach of central banks to expand their balance sheets is to buy bonds from the market, the ECB decided to follow an expansionary policy with a slightly different approach.
The ECB decided at the height of the credit crisis to increase the money supply and the inter-banking liquidity by offering 12-months loans, at a fixed rate, of 1% – which, by all standards are very low. The main advantage of this strategy over the standard one of buying government bonds is that the program exit is much cleaner and more straightforward.
At the last 12-month refinancing operation, the ECB drew bids of approximately €96.9bn, inline with the market’s forecasts.
Among the major central banks, the ECB is the first to officially exit from the quantitative easing policies. In February, the Bank of England’s asset-purchase program is also expected to end, while the Fed’s bond purchases are expected to last for a while, and at least through until February and March.
At the opposite end of the scale is the Bank of Japan, which is under pressure to create inflationary expectations, something that the bank has a long history of failing at this objective.
Central banks exiting QE strategies do not necessarily have any immediate traction in the currency market, but overall do point to higher interest rates, and therefore a more attractive currency to buy.
The end of QE policies can be taken as precursor for higher interest rates, even though it will take a while until the Fed, ECB or BoE will raise overnight lending costs. Heads up traders! The ECB may just have initiated a long-euro play.
TheLFB Trade Plan of the Day is one of the six that are available to members on the major pairs each day, plus four Jpy based cross pairs, as well as S&P futures, oil, gold, and the dollar index.
