First a little background: in the wake of the financial crisis in 2008-2009, the ECB had been compelled to cut interest rates to negative; they currently sit at -0.4 %. The intent of negative rates is to encourage institutions to lend money rather than park it at the ECB. If euro banks aren’t lending, then they are forced to pay the ECB to sit on their cash, or take greater risks in their lending practices. This has been hurting EU bank profits for quite some time, as the chart below indicates.
Well, some relief may be on the way for EU banks, but this doesn’t necessarily bode well for anyone who is long the EURO.
According to Zerohedge, “the ECB is current analysing whether or not to implement a “tiered deposit rate” through which certain banks wouldn’t have to pay as much interest for sitting in cash.” In other words, the ECB is making this action because it doesn’t see rates ever coming back to positive in the foreseeable future. That should be ringing some bells.
Technically,the Euro has grown tired of the 1.15 handle. We will see it eventually get to previous support at 1.05. Our quantitative trading systems also recently went short again on the Euro.
At the same time, we have lowered growth expectations out of the US and the Euro zone.This will force Central Banks to remain neutral to dovish in the foreseeable future. For those expecting some sort of crash to come to the equities market, we really don’t see that happening; and there are a number of reasons for this.
The most fundamental of these is Central Banks’ willingness to take preventative measures to assuage investors. Central Banks didn’t behave the same way in previous decades. Now, with the global economy so intertwined, and with capital so mobile, it seems they must act in consort. As investors, what does all this mean and how do we take advantage of it?
Adam Jagiellowicz is co-founder of Online Finance Academy. He teaches the Master in Trading Course and develops trading algorithms for forex and commodity markets.
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