Wednesday, 28 January 2015

Forex Essentials, Making or Breaking The Global Economy

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Basic Trading Concepts Defined

While Draghi’s was announcing the late arrival of QE to bring the Eurozone back from the brink of its deflationary trajectory, Christine Lagarde was in Davos preparing her speech notes for the World Economic Forum warning that this is the year  ‘to strive for economic growth or accept stagnation; to work to improve stability or risk succumbing to fragility; and to cooperate or go it alone’.

And her answer? Global cooperation overseen by institutions such as the IMF and fiscal reform country by country, with policy ‘focused on promoting growth and creating jobs’, including closing the gender gap.

And here is her warning if we mess up; ‘The global economy risks getting stuck in a “new mediocre” – a prolonged period of slow growth and feeble job creation’.

Lagarde continues to see the US as the bright spark in an otherwise lacklustre outlook for the global economy and included her own expectation that the US is more likely than not to raise rates by the summer of this year. She gave praise to Yellen for communicating with the market (still probably bemused by recent lack of transparency shown by the SNB), and for a terrific job as FOMC chairwoman , with some infant signs of inflation and a strengthening jobs market.

Ironically for Legarde, the ink was barely dry before the pre-QE tensions between Germany’s Merkel and the ECB chairman started spilling into the press. Draghi did please the market with the amount of the liquidity  announced on Thursday which amounted to 60 billion per month for at least 18 months. There is, however, a lot of confusion as to the mechanics and whether it can even be effective in such a disparate union.

Germany’s concern remains;  structural reform is necessary to support the monetary policy. And, indeed Draghi himself is only too aware of this as he expressed it  ‘monitory policy can create a basis for growth, but for growth to pick up you need investment and for investment you need confidence and for confidence you need structural reform’.

The Germans have their issues with Draghi and the QE debate which the Greek situation is not helping. The new government may be demanding debt forgiveness and Germany is their biggest creditor. The German press have already referred to Merkel’s preference for Grexit rather than concessions to the debt.

There is a growing feeling that the German stance can derail or at least undermine the momentum that QE was intended to bring to  a zone perilously close to deflation with a chairman intent on deflecting it.


Forex Outlook for the Euro:

As the ECB are now planning to buy bonds from Eurozone countries, the effect will be for bond yields to fall. They are already at record lows . The following chart is the German 10yr Bund yield in what is now a steep descent;

Reference: Judith Waker

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