The ECB began buying assets. Fundamental analysis for 20.10.2014

20.10.2014
Since the end of last week, the news background is beginning to return to its previous course. The index of consumer expectations in the United States has established a six-year high, and the number of applications for unemployment benefits is for the first time back to pre-crisis levels. Against this background, the industrial production growth of 1% seems quite logical. In general, if the data will continue to go this way, the Fed may well go for an earlier rate hike schedule.

Moreover, an additional factor for the weakness of the euro was the beginning of the ECB's purchases of short-term secured bonds (Covered bonds). According to Bloomberg, on Monday the regulator made a redemption of bonds of French issuers. According to previously announced plans, the ECB plans to repurchase mortgage bonds with a parallel launch of a new wave of commercial banks providing cheap credit on the terms of their further use for the financing of small and medium-sized businesses.

The weak euro zone recovery stalled in the second quarter and the latest data on industrial production leaves only an extremely weak hope for growth in the third quarter. Moreover, inflation is still at the level of 0.3%, despite the lowering of the rates of the ECB to the minimum level. The effectiveness of the initiated asset purchases by the regulator in support of inflation is still raising questions.

The matter is also in the fact that the national government did not deal with the ECB and refused to provide guarantees for a variety of securities, with the result that the regulator is forced to buy only the most reliable of them. Since the banks are not likely to have any excessive enthusiasm in the direction of increasing the scale of lending in the current, very difficult conditions, it is likely that to return of inflation to acceptable levels the ECB still have to buy government bonds from the euro-zone countries as well.

The main opponent of such measures is Germany. Over the weekend, we heard new comments from the head of the Bundesbank, which has once again highlighted the importance of structural reforms, which implies that in Berlin they do not intend to abandon the requirements to further reduce the spending of the euro zone countries. Consequently, there is a risk of conflict of Paris and Brussels, as France has almost abandoned the idea of a forced reduction in the budget deficit.




I still hold transactions on the sale of the Eurodollar. As during the week (on Wednesday) rather weak data on European PMI is expected, then there is a significant likelihood of further reduction of the currency pair. In the short term, we are likely to see a further flat because on Tuesday any meaningful statistics are not planned.
 
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