The European Central Bank said on Thursday that it would slowly start withdrawing the emergency liquidity it doled out during the recent economic crisis, stating that the next 12 month refinancing operation for banks would be the last. The ECB also revised its GDP forecast for 2010, and kept their record low 1% interest rates intact, helping to lift the Euro broadly against a variety of currencies. Regardless of the seemingly positive news from the ECB, Jean Claude Trichet, the ECB President did express caution with respect to the coming year saying “some of the factors supporting the recovery at present are of a temporary nature. The Governing Council expects the Euro area economy to grow at a moderate pace in 2010, recognizing that the recovery process is likely to be uneven and that the outlook remains subject to high uncertainty.”
At 9:00 GMT, the Euro was trading up .3% to the US Dollar to 1.5088, up 1.25% to the Japanese Yen to 133.1, up .64% to the British Pound Sterling to .9103, up .5% against the Canadian Dollar to 1.5893 and even versus the Swiss Franc to 1.5069.
Charts: Euro in Focus
n today’s two charts we have a look at interest rate spreads using the December 2010 Euribor/Eurodollar comparison and then look at the correlation of the S&P500 with the EUR/USD. It is rather clear at the moment that trading the world’s most liquid EUR/USD currency pair is essentially the same as trading the S&P500. Equity traders note the Greenback as a driver for equity sentiment, and currency traders note risk appetite as the driver. It is clearly a reflexive relationship. Over the last 200 trading days, the correlation of the EUR/USD and S&P 500 has been above 0.95. On the interest rate expectation chart, note that the spread has tightened a bit lately, this has also been the case for the likes of Reserve Bank of Australia and Bank of Canada expectations relative to Federal Reserve expectations. But for the moment, it appears our focus should remain on risk appetite measures for USD direction more than, for example, any signals that Mr. Trichet may or may not be sending about the ECB’s monetary policy plans. The cycle must eventually end, of course, but we’d like to see some sharp divergences first. Let’s have a look again at these kinds of correlations as a new trading year gets under way in January.
Written by Finexo.com