Draghi forceful; market response predictably erratic

This is their major push to stimulate lending to the nonfinancial sector, which they believe will be welcomed by the banks in spite of some additional reporting requirements to ensure the ECB accommodation is being properly channeled into the right areas. As a further sign of their commitment to this mechanism, he was also very pointed in noting that today's fractional rate cuts were likely the lower bound of rates for now.

▪ The market response to today's ECB rate decisions and initiation of the new programs discussed at the press conference was both disjointed and totally rational at the same time. No surprise that the equities liked the idea of further overall stimulation, yet had a short-lived downside correction from higher ground when President Draghi was forthright about the fact the new programs might take the better part of a year to have a real impact.

▪ And with a further central bank stimulus program announcement, it was not so hard to guess the govvies response was going to be very interesting as well. And had we not already anticipated where the key supports were below the major developed economy government bond markets, the initial weakness in the wake of further central bank accommodation might have been disconcerting after the recent substantial selloff. They have rebounded nicely from those levels.

▪ In a somewhat similar fashion, the foreign exchange was the most predictably fun of all. The key had previously been the aftermath of reactions which had seen Europe weaken a bit in the wake of recent Eurozone officials talking the euro down. EUR/USD saw a lot of folks focus on 1.3600, as it was recent congestion and a key long-term moving average. However we had noted extensively of late that even if it should slide below it, the more major support was in the 1.3550-00 range.

What followed was very similar activity to the German Bund(EUREX:GG.C) (10 year government bond) future in a wholly different asset class. The initial test of the low end of that range has seen EUR/USD ratchet back up to trading over a half cent higher on the day by lunchtime in the US. It is also no surprise with weak sister euro on the mend against the greenback the other major developed economy currencies are also all rallying against the US dollar.

 

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About the Author
Alan Rohrbach

Alan Rohrbach is Lead Analyst and President of Rohr International, Inc.  He is an international equity index, interest rate and foreign exchange trend advisor. His forte is ‘macro-technical’ analysis of how fundamental influences blend with technical aspects to drive trend psychology. Clients include international banks, hedge funds, other portfolio managers and individual traders.

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