The European Central Bank this morning kept rates on hold at
0.75 percent and did not launch any new policies as the European
economy continues to suffer under the weight of its own debt.
President Mario Draghi, since launching the Outright Monetary
Transactions (OMT) scheme this summer, has yet to activate the
program since neither Spain nor Italy have requested a formal
In it's latest growth and inflation forecast, the Bank's
economists did paint a much more bleak portrait of the European
economy than they had in the previous set of forecasts. The ECB
cuts its 2012 growth forecast to -0.4 to -0.6 percent annualized
growth and slashed its 2013 estimate to between a 0.9 percent
contraction and a 0.3 percent growth. Previously, the ECB had
forecast 2013 growth to be between a 0.4 percent contraction and
1.4 percent growth. Further, the Bank cut its inflation forecasts
for 2013 to between 1.1 and 2.1 percent, with the midpoint of the
range below the ECB's target of 2 percent inflation.
One notable point from Draghi's press conference was his
discussion of the decision to leave rates unchanged at 0.75
percent. Although the consensus forecast was for no cut in the
benchmark rate, some economists have suggested that a 25 basis
point cut in the rate is needed. However, Draghi said that there
was a "wide discussion" on rates at the meeting and that the
decisions was "taken by consensus." This could hint that the ECB
Governing Council is becoming more and more divided on rates and
could cut rates in the near future if the economic outlook
Famed economist Nouriel Roubini, famously called Dr. Doom for
his bearish calls in late 2007 and early 2008 before the collapse
of the financial system, was on
this morning saying that with growth and inflation forecasts
falling below the ECB targets, the Bank will have to ease in
2013. As the Bank has been against outright QE, easing will most
likely come in the form of further rate cuts and the activation
of the OMT, most likely by Spain and Italy in 2013.
Analysts at Credit Suisse agree with Roubini's assessment of
2013 policy. The strategists there believe that Central Banks, to
make any real impact on employment in 2013, will need to drive
down real 10-year bond yields to between -1.5 percent and -2
percent. With real yields hovering near -1.0 percent, this would
require the banks to print significant amounts of money and make
large-scale asset purchases to drive rates lower.
There are many headwinds facing the European economy in 2013,
and this is reflected in the bearish forecasts for the eurozone
economy. There is uncertainty as to whether the OMT will be
activated by either Spain, Italy, or potentially another member
of the currency zone. Also, a German downgrade, as rumored about
in the first quarter of 2013, could spark a new round of the
crisis which calls into question the finances of the healthy
countries, let alone the failing peripheral states.
<p.investors can="" take="" a="" bearish="" bet="" on=""
the="" continent="" by="" shorting="" euro.="" for="" those=""
not="" trading="" currencies="" currencyshares="" euro=""
href="http://www.nasdaq.com/symbol/fxe">FXE) is an ETF that
tracks the euro and shorting it can allow the investor to place a
bearish bet on the currency. Also, for those who do trade in the
FX market, shorting the EUR/AUD seems attractive here. With the
breakout in the AUD/USD above 1.05 this morning and the breakdown
below the uptrend dating back to last summer in the EUR/AUD,
shorting the pair looks attractive at current
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