Transcript of the Interview between Swiss Financial Television and Alessio Rastani
1: The ECB seems to be in this wait and see period how is this affecting the common currency? Do analysts see risks in further Euro gains?
There have been fresh reports that the ECB is “shrinking” its balance sheet and beginning to tighten its policy of monetary easing. Banks are beginning to “pay back” their loans to the ECB early. Some are seeing this as a sign of greater financial stability for the Eurozone. But there are still many risks here. For one thing, if this causes a rise in the Euro (which most probably it will) then this will put pressure on exports. As we know, Germany benefits from a weaker euro – a weaker euro makes its exports competitive. So a higher euro will not be welcome at a time when the Eurozone is still struggling in its recession.
Secondly – let’s not kid ourselves that the ECB’s “shrinking balance sheet” and banks paying back loans is a sign of financial stability. Nothing of the sort! As the economist Richard Koo (of Nomura) has argued the biggest problem in Europe right now is NOT the lack of supply of money – but the lack of demand for credit.
The big surprise of this economic crisis is that money stopped flowing through the economy! They threw more money into the banking system and it stuck there. This is a Liquidity Trap! The money is not washing around and is not doing any good – so what did the ECB do? They put more money in! The expansion of the money supply is enormous – but it is not really being demanded. Until people want to borrow money in Europe – Europe’s problems will not be solved.
2: What are your short mid and long term predictions for the Euro Dollar?
Well interestingly everyone is talking about the fact that the Euro is rising against the dollar. Little is mentioned about the impact of the Yen and the dollar index on the euro. But let’s cover the EURUSD first. Short term we have strong resistance at the psychological 1.3500 region – this level is also where the 200 Moving Average is (on the weekly charts) – a key technical level. Question is whether the EURUSD will break this 1.35 level – and I believe it will. A lot will depend on key economic news coming out today with the US GDP figures and the FOMC (Fed announcement) this evening. If we break 1.35 – we most likely will see the Euro rallying to the 1.3832 level which is the next level of resistance.
We also have to appreciate that part of the reason for the euro rally has been the weakening Yen which has just been in freefall for the past few weeks. A weakening Yen and soft dollar has been part of the cause for a strong euro. I believe also that the Dollar index is due for a medium term rally – or a “dead cat bounce”. In fact – I believe that will be the big surprise in February – which is a rising dollar (which currently is in a triangle consolidation pattern). The Yen has to stabilise first and once it does – combined with the rising dollar – means that the Euro will make a medium term top – probably lasting for the first half of 2013.
3: Ever since the UK Prime minister announced the EU referendum the pound has been on a slippery slope down, can anything stop the GBP journey south short term? Do you see this weakness around against EUR for a long time?
In regards the UK – and David Cameron’s comments – one has to take that with a pinch of salt. When you examine what Cameron actually said – He said if he gets re-elected in 2015 then he will offer the British people a referendum by 2017 on whether the UK should stay in the EU. Firstly – he never committed himself to a “No” vote on the referendum, and secondly, it is only political gesturing to Brussels and his own Euro-sceptic base – and finally he himself has admitted that he would prefer Britain to stay in the EU.
The GBP’s journey south as you put it, is due to the fact that the UK’s problems are probably worse than the EU. I don’t know if you remember Jennifer but the last time we spoke back in October – I said that the UK’s positive GDP figures back then would not last – that it was a one-off perhaps due to the “Olympic boost” – that we needed to see consistency. And as we have seen it did not last. The economy shrank again in late 2012 by 0.3%.
Not many people know this but the UK is still only HALF WAY through the great deleveraging that began in late 2008. There is still a further 4 to 5 years of this left – where companies are trying to minimise debt instead of borrowing. The UK economy has shrank due to tight austerity measures taken by the government (at a time when people have stopped spending and borrowing), and also the fact that UK’s lending policy is still tighter compared to that of Europe and US. So yes – I do see further decline in the GBP until we see evidence of growth in the UK.
4: What are your short mid and long term predictions for the Pound Dollar?
I think short term the GBPUSD will hold the uptrend line support at 1.5620 region. We could see a temporary bounce there. But I believe long term that level will break – specially as I suspect that the Dollar will rally (for the next few months). So ultimately I expect the GBP to head to its 2012 lows of 1.5232.
5: Has the Yen reacted to Tuesdays decision by the Bank of Japan to follow the government’s request to increase the inflation target to 2%?
Yes it would appear that it has done. And the Japanese government seems adamant on continuing its monetary easing policy to beat deflation. We have seen the Yen continue its downward freefall which started late last year. The question is now when is this decline going to stabilise. It is due for a reversion to the mean (or snap back rally) but that may still take time to happen.
6: What are your short, mid and long term predictions for the Dollar Yen?
Once the Yen’s fall has stabilised we probably will put a medium term top at the 92.80 level – that is where we have resistance on the USDJPY in the form of its monthly pivot points. Long term though, I wouldn’t be surprised to see the USDJPY heading to 95 and 100 by end of the year.
Alessio Rastani is a full-time Trader at LeadingTrader.com