These days, European Central Bank President Jean-Claude Trichet isn't too popular in currency market circles, if one trader is any indication.Trichet, a legendary inflation hawk, campaigned for and secured a quarter-point interest rate increase Thursday, to 4.25%, in the ECB's key, short-term interest rate, the refinance rate. Many economists thought Trichet's action was premature, despite Europe's 3.7% annualized inflation rate, and that it could spell further economic slowing Europe. Unbowed, Trichet plowed ahead.
With the above as a backdrop, many currency traders, Andrew Resnick among them, plowed ahead with euro-long trades on the calculation that a higher interest rate for the euro will cause the euro to rise. Resnick went long with the euro in the euro-dollar currency pairing.
But then what did Trichet do? He stated at the regular post-ECB rate decision press conference that he has "no bias" and that "we have no pre-commitment" to raise rates further - - signaling that one interest rate increase may be enough, Bloomberg News reported.
The result? The euro plunged versus the dollar after his comments: it fell 1.2 cents - - a large price move in the currency market - - to $1.5758 Thursday morning.
And with it plunged Resnick's profits for the day. All his trades were stopped-out for losses.
'Trichet is making many friends among traders'
"Trichet," Resnick said, "isn't making many friends among traders, and probably not among business executives and economists as well." Resnick followed his evaluation of Trichet's social standing with several candid and frank, descriptive, colorful comments about the ECB president that can't be published here. Suffice it to say that Resnick is not happy with Trichet's two-step.
"Trichet really messed up. The currency market mantra for monetary policy officials is 'no signal or clear signal, but not confusing signals.' Today Trichet sent confusing monetary policy signals and messed up everybody's trades for today, basically," Resnick said. "He created a whipsaw day. Red screens everywhere." Resnick added that he was presently flat, or had no open currency trading positions.
What Trichet should have done, in Resnick's view, was "announce a rate increase, and then state that inflation is trending higher, and we'll use monetary policy to check it, if needed. Instead, he [Trichet] comes out and says 'well, now that I've raised rates once, that should be enough.' That's the equivalent of acting to tighten monetary policy, then going to a stand-pat stance in minutes and it created the whipsaw. It was one of the worst implementations of monetary policy I've seen in 15 years of trading. Just horrible."
Monetary Policy Analysis: Resnick did not mention the ECB's impact on the U.S. Federal Reserve. The Fed may now be compelled to increase interest rates to support the dollar, in order to prevent a further dollar slide and more commodity-based inflation. Rising U.S. interest rates should help strengthen the dollar and check U.S. inflation, but they undoubtedly will also delay the U.S. economic recovery, hurting Europe's economy, as well.
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Reader Comments (Page 1 of 1)
7-03-2008 @ 3:26PM
william lindblad said...
The only thing that I read here is that Resnick is not as smart as Trichet. JC is a known hawk who does not care what the rest of world (currency traders included) thinks. The only thing that I make of the "no bias" statement is that he was making an innuendo that was intended to support the dollar. The fuel problem is over there too. Obviously, he did catch some fish and I would not read anymore into it than a typical Gallic shrug. As things stand, I would expect further hikes German inflation is up and confidence down and that's the barometer over there.