Hawkish Central Bank Driving Euro
03/22/2011 1:00 pm EST
The euro has been very volatile due to hawkish statements from the ECB, says Boris Schlossberg, who discusses the unconventional policy measures now in play in the euro zone.
A lot of people are following the euro these days, moving quite a bit, and affected by external factors. Our guest today is Boris Schlossberg to talk about that. Boris, talk about the euro and what you're watching and concentrating on here.
Well, you know the critical thing with the euro right now is the whole transition phase. We have Jean-Claude Trichet, who is the president of the ECB (European Central Bank), who is going to be leaving at the end of this year and his slot is actually a void right now, so there's a lot of competition amongst various members of the ECB of who's going to become more uber-hawkish, trying to out hawk each other, in terms of making very, very strong comments about inflation and possibly raising rates, but in fact, the ECB now is kind of mandated not just to control inflation, but it's really mandated to support the euro itself, and of course the sovereign debt crisis in Europe hasn't gone away. The ECB has stepped up and bought a lot of the sovereign debt from a lot of these troubled nations in a very uncharacteristic mode, in order to basically stabilize the euro and I think that work is going to have to continue as we go forward, so while the rhetoric may be tough, I think the action will be much softer.
How about price wise? What effect will it have on price action going forward here in 2011?
Well, I think one of the critical things about the price action in the euro is just how volatile it's been. It's just been a very see-saw market because of this uncertainty, both on the interest rate front, on the succession front, and on the sovereign debt front; just whether this problem can be controlled or not, at this point. Ironically enough, fundamentally the European economy is doing quite well. It's continuously surprised to the upside, especially core countries like German and France are doing very well and are able to carry the rest of the euro zone forward, but the problem going forward is will it be sabotaged by a lot of the geopolitical issues that are facing us.
What effect do you think inflation and the economy here directly in the US will have, if any, on the euro itself?
Well, you know, inflation actually, both in the euro zone and in the US has been relatively tepid. It's really been in the emerging markets where it's been completely out of control, so while there's rumblings going on right now that inflation is starting to pick up, I think neither the US monetary authorities nor the European monetary authorities are genuinely concerned about it. Certainly, they're making noise and they're making some rhetoric in reference to it, but I don't think there's going to be any action as far as ECB goes, at least until almost the end of this year.
For professional traders, I know they've followed the ECB for years. For the retail market, maybe not so much. It's almost as much as they're following the Fed these days. Is that the case?
Exactly. Well, you know I think very much so in some ways almost more so. The interesting thing about the ECB, both from a retail point of view and just from a general investment point of view, is that they tend to be much more transparent. Every single month the ECB holds a press conference, which is available on the Web for anybody to see for absolutely free, so you could actually have a viewpoint, a gateway into their own policy-making mechanism, because the president comes out and just discusses for about an hour and a half, very unlike the Fed, which is much less transparent, and only simply makes a few utterances once a month on their FOMC (Federal Open Market Committee) statement.