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This is achieved by 2 toggling the 2 pillars of monetary strategy :
1. The M3 (or the Money Supply)
2. The economic factors which might have a bearing on inflation.
Needless to say , the persona of the Bundesbank prevails over the fledgling ECB, and it is a known fact that it targets inflation.
Lets look at the first point regarding M3. It is judged relative to a reference value of 4.5%.(The latest figures for March put it at 5%)
On the second pillar, the ECB believes the upward risk to price stability has diminished but not disappeared. This is judged relative to a reference value of 2%
The risk could be categorized as :
1. Core-inflation: This has been in a steady up-trend, basically because of the second round effects and the lagged effects of oil price hike, and depreciation of the Euro.
2. The above trend growth of GDP, which poses a risk to wage inflation. This is a major factor because the impending wage agreements could have a major bearing on inflation and hence ECB's decision on cutting rates.
The market at the moment is perceiving the FED to be pro-growth oriented and hence rewarding the US dollar . The ECB is being perceived at too rigid and behind the curve , and especially after the latest M3 figures the market has lost hope of a nearby rate cut. The inflation numbers from Germany and Italy have come out on the higher side and so have the numbers from Spain , thus dashing all hopes that the inflation figures might dip below the 2% mark soon . It currently hovers around the 2.6% mark.
So the key variable driving the Euros value will be the decision on the rates by the ECB, and in turn the key variable driving the ECBs decision would be the M3 and the CPI figures. As traders this would be the right time to focus on Euro weakness to initiate long positions, this is because the ECB will eventually have to cut rates, and till the time it doesn't , the yield play will come into focus , supporting the currency for the time being.
Next time we would look at option strategies to capture this view on the Euro that we have .So watch out for this column regularly .
Concluded
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* The author is a Head Trader at Wall Street Global Opportunities Fund
Disclaimer:
The contents of this publication should not be construed as an express or implied promise , guarantee or implication by any of the Wall Street Group of companies that you will profit from the strategies herein or that your losses in connection therewith can or will be limited .
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