The euro zone is on the brink. Fundamental analysis for 15.12.2014
15.12.2014
With much difficulty, last week the ECB expanded the possible volume of purchases of securities up to 1 trillion euro. Disaffected, as always, were the Germans, and now the official Berlin could step up its action in the European Court, strongly discouraging the expansion of the ECB's portfolio. The representatives of six euro zone countries voted against this decision, and their motives can be understood.
The fact is that there is a well-founded fear that even this trillion is not enough to stabilize the situation. But if Mario Draghi acted at the same time as his colleagues from Washington and London, then, perhaps, the current volume of cash injections would have been enough. However, the Bank of England bought up about a quarter of the national public debt so it was actually shifting money from one pocket to another.
In the current conditions it is difficult to imagine that the ECB will be able to redeem the same proportion, for example, of the Italian national debt, not to mention the total amount of the debt burden of the euro zone. Although Germany has an equal voice in the Governing Council, as well as other countries in the euro zone, if Mario Draghi will act contrary to the position of Berlin, it may cause a serious conflict within the monetary union.
In parallel, the lending is being “stalled.” Earlier, the ECB had planned to give banks about 400 billion euro until the end of the year under the LTRO, but this plan was carried out only by half. All this is happening against the backdrop of almost a minimal key rate and a negative deposit rate, but the banks even in such circumstances are in no hurry to increase lending, and its current rates are inadequate for dealing with low inflation.
The latest inflation data shows a modest growth rate of 0.3%. However, given the current drop in oil prices it might soon be in the negative range. In this scenario, the ECB will be forced to start over the active asset purchases that will inevitably lead to a new conflict of interest, especially if the regulator begins to pump debt bonds of the euro zone countries on its balance sheet.
I still hold transactions for sale on the Eurodollar. Since on Tuesday a large block of PMI statistics euro zone countries is expected, on this data a resumption of the downward movement is possible. The greatest concern is France, the industrial and service PMI of which are below 50, which means a reduction, and therefore - the recession in the Fifth Republic is not far off.
RoboForex Analytical Department
The fact is that there is a well-founded fear that even this trillion is not enough to stabilize the situation. But if Mario Draghi acted at the same time as his colleagues from Washington and London, then, perhaps, the current volume of cash injections would have been enough. However, the Bank of England bought up about a quarter of the national public debt so it was actually shifting money from one pocket to another.
In the current conditions it is difficult to imagine that the ECB will be able to redeem the same proportion, for example, of the Italian national debt, not to mention the total amount of the debt burden of the euro zone. Although Germany has an equal voice in the Governing Council, as well as other countries in the euro zone, if Mario Draghi will act contrary to the position of Berlin, it may cause a serious conflict within the monetary union.
In parallel, the lending is being “stalled.” Earlier, the ECB had planned to give banks about 400 billion euro until the end of the year under the LTRO, but this plan was carried out only by half. All this is happening against the backdrop of almost a minimal key rate and a negative deposit rate, but the banks even in such circumstances are in no hurry to increase lending, and its current rates are inadequate for dealing with low inflation.
The latest inflation data shows a modest growth rate of 0.3%. However, given the current drop in oil prices it might soon be in the negative range. In this scenario, the ECB will be forced to start over the active asset purchases that will inevitably lead to a new conflict of interest, especially if the regulator begins to pump debt bonds of the euro zone countries on its balance sheet.
I still hold transactions for sale on the Eurodollar. Since on Tuesday a large block of PMI statistics euro zone countries is expected, on this data a resumption of the downward movement is possible. The greatest concern is France, the industrial and service PMI of which are below 50, which means a reduction, and therefore - the recession in the Fifth Republic is not far off.
RoboForex Analytical Department
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Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex bears no responsibility for trading results based on trading recommendations described in these analytical reviews.