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Euribor: poised at a pivot or stuck in a rut

17 July 2009

The Macro Trader’s view:

As recently as late spring the ECB declared that the bottom of the recession would be plumbed by the middle of this year, and growth would resume during 2010. But no sooner had they spoken than key industrial and manufacturing data turned decidedly weaker, especially in Germany.

This caused a major rethink among traders, who launched a month-long rally as they began to speculate that the ECB might have to review its interest rate policy and perhaps consider reducing interest rates to below 1.0%, something they had said wasn’t a path they wished to take.

And questions were asked about the way the ECB was applying Quantitative Easing. Was their version working? It meant pumping record amounts of liquidity into the Banking system and buying only covered bonds.

But, once again, events took an unexpected turn. German factory orders and German industrial production rose by much more than expected; so much so, that analysts immediately began speculating that the German economy, and by extension, the Euro zone economy was indeed beginning to stabilise.

Predictably Euribor began to trade lower, as thoughts of further policy actions from the ECB began to evaporate. Where on earth is this market left?

Should traders now turn bearish, or will recent data prove yet another false dawn? Only this week Euro zone industrial production data came in weaker than expected.

In truth, we judge this market is likely to remain range-bound for a further period. The recent stronger German data seems more than a mid-trend blip. But a bigger improvement would be needed right across the Euro zone before the ECB will even consider tightening interest rates. We cannot see that happening at all this year.

And, given that the ECB has relied mainly upon pumping liquidity into the Banking system, we judge that policy is likely to continue too. Especially since Euro zone Banks still have approximately EUR 282.0B of toxic assets on their balance sheets.

We judge Euribor is likely to trade within a range for a further period, lasting at least through the summer, defined by the low caused by the sell-off in response to the US non-farm payroll report in June and the highs made over the last several days.

Day traders may find that there is very short-term price action to prey upon, but longer-term traders should anticipate a frustrating period ahead

The Technical Trader’s view:


The clear trading range has been defined since the beginning of the year. Look closer


Today’s reluctance to drive down through the first support of substance at the Prior High at 98.20 is revealing. Until that breaks the bears have nothing to crow about. And the bulls? For the moment they still have the possibility of a renewed assault on the All Time High, or, more precisely, the twin Highs at 98.36/7.

If they were to break there would be no stopping the market. That is the nature of Pivots. But until then, stand aside!

Mark Sturdy,
John Lewis
Seven Days Ahead

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