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Video / 25 September 2013 at 7:34 GMT

ECB is preparing for a "euro-break"

Lea Jakobiak

TradingFloor.com blogger Juhani  Huopainen believes that the European Central Bank is preparing for a euro break-up as its balance sheet is contracting, while the rest of central banks are using expansionary monetary policies.

Juhani says the ECB's decision to launch the OMT, effectively supports the sovereign countries in trouble. The problem, he says, is the competitive differences between eurozone countries and fiscal transfers needed to be in place in a monetary union. Juhani also believes, the new Supervisory Single Mechanism will help European banks as it will make them "politically viable".

As a credit crunch in the 17-nation euro area loomed at the end of 2011, the ECB offered banks as much cash as they needed for up to three years, repeating the offer in early 2012. More than 1 trillion euros was injected into the financial system.

 European Central Bank  Mario Draghi confirmed on Tuesday that the ECB is committed to keeping the cost of borrowing in the region in check, and is attentive to the effect that a reduction in stimulus in the U.S. may have on money-market rates in the future in  Europe.

 The euro fell on Tuesday and euro-area government debt, including German bunds, rose after Draghi’s comments.

6y
alpha yankee alpha yankee
Euro Break-up issue seems to be the pretext of November fall and rising VIX; not expecting the Impact earlier than October 17.
6y
Mickette Mickette
Thanks again for all your precious expertises. Never miss one of yours.
Juhani, which near/mid term trading recommendations do you have for those who are living in the eurozone?
6y
Juhani Huopainen Juhani Huopainen
Basic macro: The ECB keeps monetary policy tight vs. US and JP -> EUR strength. EURUSD is capped as the Fed taper-threat and ECB's verbal interventions and threats of another LTRO depress the euro. So range-trading, as it has been for the past couple of years - albeit even tighter in the past couple of months.
6y
Juhani Huopainen Juhani Huopainen
My main point was that the ECB's "only enough to survive, but no more"-line is just pressure on the crisis countries to "reform", i.e. go through periods of painful internal devaluations. When the ECB's holdings and TARGET2-intrasystem debts were larger, the crisis countries were in the driver's seat (remember "Spain is not Uganda"-negotiations). ECB's tightness has partly lessened the negotiation power of the crisis countries.
6y
Mickette Mickette
Do you believe there is a chance to let EUR/USD run to 1.3835?
6y
Juhani Huopainen Juhani Huopainen
Not in the next six months or so. Right now, the pair is grinding a flag on the hourly charts (following the no taper-spike higher). I guess there might be one more leg higher, but at that point the upper end of the trading range getting nearer should start decreasing appetite for the euro. I'm looking for a short EURUSD entry at current / higher levels for intermediate time, but have learned that it is too expensive to be too early on a case. My best guess is one leg higher, perhaps to between 1.36-1.37, but that should be it.
6y
Juhani Huopainen Juhani Huopainen
Momentum is still up, the chart shows no close resistances, and we are in a flag that is supposed to be followed by another leg higher. No reason to play the downside yet.
6y
Mickette Mickette
"[...] but have learned that it is too expensive to be too early on a case [...]"
Juhani, I´m still doing this big mistake.
I´following your FLAG on my radarscreen!
6y
Juhani Huopainen Juhani Huopainen
Personally, I'd play the flag with a short from the current 1.3505 with a S/L at 1.3525 and TP at 1.3470.
6y
Mickette Mickette
ROGER!
6y
Mickette Mickette
Sorry to have been stopped on this trade but it was fun to try Juhani.
6y
Jim Earls Jim Earls
Kind of long in the tooth here.
6y
dominom dominom
with the eurusd I would not short that thing before the fiscal "issues" in the US are resolved. There is the risk of an upside shock any time until there is a resolution of the debt limit. Also people are slowly getting used to the fact that there is no tapering and will not be any tapering any time soon which is also presuring that thing up. After that (and the leg higher :) ) we could maybe return to the fundamentals and technicals of all us euroskeptics... :) ...
6y
Mickette Mickette
@dominom + Jim. I´ve learned to take all your comments into account.
Good night to both.
5y
mklease.broker mklease.broker
This comment has been redacted

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