A certain Jean-Claude kicked butt yesterday and no, I'm not talking the guy from Street Fighter and Universal Soldier. The dude I'm referring to is ECB Governor Jean-Claude Trichet, and he doesn't need to take off his shirt and intimidate you with an unbelievably muscular body, no sir! All he needs are words and those are enough to send jitters down your spine.
Yesterday, Trichet left a lot of market participants crippled, torn as they were on how to interpret his speech during the bank's monetary policy announcement. Here's the lowdown on what he said:
First, he talked about extending the emergency liquidity measures up until the end of the year. Emergency, what? That doesn't sound too good. Basically, this means that the ECB bank is giving banks from all over the region easy access to credit. It currently has a budget of 590 billion EUR available for lending and it is expecting that an additional 355.9 billion EUR will be needed to meet the needs of the banks for 2010.
According to Trichet, the ECB is worried that negative effects of the slowdown in the US economy and those of the periphery countries in Europe may spill over to the euro zone. He also cited that the ghost of debt issues still haunts the bank. Needless to say, keeping billions worth of moolah for financing ready is just a safeguard when the debt boogeyman steps out of the shadows.
With that, most of the big guys on the region's monetary policy committee were convinced that keeping borrowing costs at a record low of 1.0% was the best thing to do. Banks, especially those from debt-ridden member-countries (Hey Portugal, Ireland, Italy, Greece, and Spain. What up?), will have a harder time clearing their balance sheets if the ECB decided to hike rates.
On the brighter side of things, Trichet announced that policymakers have a brighter economic outlook for the region. GDP figures for 2010 are seen to land between the range of 1.4% and 1.8%. Back in June, the ECB's crystal ball was only showing a growth rate in between 0.7% to 1.3%.
Trichet and his homies also revised their growth forecast for next year to 0.5% to 2.3%, compared to the 0.2% to 2.2% consensus in June. Boo yeah! Trichet cited the optimism as primarily due to the increase in the prices of commodities.
So that's a very cautious statement from the central bank, followed by growth forecast upgrades. Bearish then bullish... Where does that leave the euro? In consolidation, that's where!
EURUSD may have moved a few pips here and there during the ECB statement but, at the end of the day, it settled right back where it was prior to the announcement. My my, it looks like euro bulls and bears are playing tug-o-war! Or could it be that traders are simply unsure where the euro's headed, given the mixed signals from the central bank?
One thing is for sure and it's that nothing is for sure. Uncertainty is the name of the game for the euro zone right now and, as Trichet mentioned, there are still plenty of downside risks present. For one thing, other economies (ahem, US) are still in danger of that big bad R-word and this poses a threat to euro zone exports. He's also wary about the persistent increases in commodity prices and the existing global imbalances in trade. Worrywart, much?
Chill out, Mr. Trichet. Compared to the rest of the major economies, the euro zone is enjoying a more stable economic standing... for now, that is. Can they keep it up?