ECB Surpise Interest Rate Cut

I think most were surprised by the 25 basis point interest rate cut down to 0.25%. The Eurozone is facing more of a deflationary environment than an inflationary at the moment so I assume they felt the comfort of it. I am glad that the ECB does not want to make the same mistake as Japan and the US have done and print money in order to artificially create something.

I am not saying that the ECB has taken the right steps and is a great central bank, but if I have to compare the ECB with the US Fed then they are far superior in my opinion.

Either way, the interest rate cut by the ECB plus the NFP report did create some nice trading opportunities (short-term as well as long-term).

I agree the rate did surprise me, however I believe that you may be giving the ECB too much credit, the Eurozone has gotten significantly worse since 2010 in terms of unemployment with it rising from 10% to 12.2%. Not to mention France’s economy is significantly deteriorating due to excessive corporate taxes and rampant unemployment, furthermore you throw in the fears that other problem child’s such as Greece, Italy, and Spain May not be all through the hurdle yet. I believe that the rate cut which will inevitably drop Eurobond yields lower, a rising unemployment rate, and low inflation might feasibly cause new trends to develop in Euro weakness notably in pairs such as EUR/GBP and EUR/USD.

What’s your thoughts?

That is why I said that I am not stating the ECB has done all the right things, but in my book they are far better than the Fed. I have a long-term view on this and I think Eurozone unemployment will decrease while the US unemployment will increase. What I like about the ECB is that they do not print money and offer a stimulus, they take the hard road which will eventually lead to success. I do dislike their bailouts as much as I dislike the US bailouts and both central banks have made countless mistakes. Picking the ECB over the Fed is simply making the better choice between to terrible central banks.

With all due respect I feel that you believe the Eurozone will succeed in terms of greater economic growth than the United States in the long run because of taking the “hard road” of not using monetary easing. However, if you look at unemployment trends of both you’ll see that so far Eurozone unemployment has actually increased while the US’s has fallen. I don’t mean to be skeptical but what other factors leads you to believe the Eurozone will perform well in the long run?

 In my opinion, I believe the Eurozone will actually continue to stagnate for the near future, given the recent rate cut, bond yields will follow, subsequently leading to a widening interest rate differential between Eurobonds and US bonds, which often leads to currency changes in the form of a stronger U.S. dollar relative to the Euro. Under the assumption that the U.S. will also raise rates within the next 6 months, because I feel the market is beginning to already price this assumption in. Not to mention I also believe that France could be a increasing greater drag on the Eurozone's overall growth, they have absurd corporate and marginal tax rates forcing businesses to leave, unemployment is on the rise (currently at 10%). Furthermore Germany is the only nation within the Eurozone that is running a positive Balance of Payments.

Over the long-term I do believe that the Eurozone will outperform the US. When it comes to real unemployment, not the fake headline figure which has contracted, the US unemployment rate is hovering above that of the Eurozone. As far as France I agree that it is a drag similar to Italy. I think the US Dollar will continue its downward trajectory as the currency is worthless due to stimulus. The US will not raise rates for a very long time and Yellen’s idiotic approach as well as comments made during the Senate Banking Committee confirmation hearing almost ensured rates will remain where they are and QE3 will not be tapered with which will all impact the USD in a negative fashion.