Euro Laughs In ECB’s Face, Takes Rate Cuts In Stride

by on November 26, 2013 2:32 am GMT

The euro laughs at the thought of continued rate cuts and loose monetary policy from the European Central Bank (ECB) as traders bid the euro up to the previous point held prior to the 25 bps cut in the benchmark rate earlier this month.

The 17-nation euro-bloc holds dwindling economic prosperity, massive amounts of public and private debt but holds the second best performing currency year-to-date.

“If you look at how much the euro has moved, and the impact that’s going to have on exports, it’s starting to be a real issue,” said Nomura’s Jens Nordvig. “It’s absolutely crucial that the ECB signals more clearly that they have more tools and are willing to use them as needed,” he continued.

The euro seems to be controlled through a magnetic force that pulls the currency back to 1.3500. The eurodollar fell through 1.33 from 1.3515 when the ECB issued the 25 bps rate cut in early November. The currency rallied back to the same level before plunging again after information was leaked about potential negative deposit rates in the eurozone. Once again, the eurodollar is back above 1.3500.

An unnamed ECB board member said that the policy makers must be very cautious about using negative rates in order to counter low inflation, .07 percent in October.

Nordvig said that there should be urgency and the central bank needs to be more aggressive, yet ECB president Mario Draghi was quick to quell any worries of negative rates.

Given the slack in the euro-economy, excessive unemployment and massive debt loads, the euro has gained 6.8 percent this year and the best performer among ten developed-nation currencies.

The euro’s performance is strongly correlated by the risk-on mentality; but when the bubble finally pops, traders will quickly turn to their eurozone’s horrendous fundamentals.