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
Hello Alessio and traders.
Nice interview and i liked your webinar last week. However i have to make some specifications here because there is a big misunderstanding about QE. Any QE.
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Banking reserves and capital restrictions and the so called “liquidity trap”
The banks have capital restrictions for the loans given in a period of time. In USA and Europe. The reserves on the other hand are always unlimited. The reserves have nothing to do with the real economy. These money do not go into the real economy and QE has nothing to do with that. When people will decide to get loans ,the banks will create them from nothing BUT with certain capital restrictions. The reserves are another story.
So we have QE that increases the reserves. This happens because “they” want to preserve the longterm interests low. Loans on the other hand can be given anyway QE or not.
Lets think of the banks as the frontier between the people and the operations of the CBs behind the banks. The transactions between the banks and the people are such that people can go and take loans anyway with the restrictions that are there. The open market operations of the “powers” behind the banks ,do not always affect these transactions between the people and the banks.
QE does not.
What i am saying is that while your analysis of what may happen seems logical ,these results come to be because of other reasons. So while we have supply of capital ,not because of the QE ,but because it is always arranged that we have on the banking level (although banks have on purpose -but not reasonably- more tightened lending policies nowadays),the lack of demand for credit is not because of a liquidity trap. There is no such thing as a liquidity trap. The lack of demand for credit is because of all the other problems caused by the same “powers”. Including austerity. Primarily austerity.
So the balance sheet recession is not as easily fixed today which in reality is not as hard. People do not get loans ,the banks do not pay the usual way ,economy does not make a come back.
Without austerity the deleveraging would take more time but economy would be more stable.
Austerity must alarm you that the “powers that be” do not really want to restrict themselves. They just want to get rid of their toxic assets ,the toxicity of which they created ,through the countries’ debts ,while getting resources in the process ,passing their own policies to the countries ,so that they can then start the whole thing again from the beginning.
The mechanics are simple. They remove money from the economy so there is no blood for the body to function. That is all. This is what they want to do and this is what they do. All other talk is pure bullshit. They will continue to do so until they buy resources for nothing. At least in my country ,Ellas.
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People act like there has never been QE in the past. Japan does nothing else than QE all the time. QE is like printing trillions and buring them in your back yard. NO INFLATION. All inflation will come because of the expectations and the misunderstanding about QE. If the misunderstanding continues for a long time then the people themselves may create new fundamentals. The powers just stay there ,doing nothing ,while people believe they do something with QE ,correct or not. The crisis is now more of a political matter than economical.
It can be solved in no time. At least at a level where the people can live a normal life.
Inflation comes for many reasons. As you said inflation needs demand for goods and capitals and increase in velocity or (i am adding) stable velocity while the money supply in the real economy increase a lot and fast. There is however another parameter that we usually forget. The potential for growth or in other words the growth an economy can sustain until it reaches maximum capacity.
When the potential is huge then while we can have increased money supply and increased velocity ,because of the fast increasing production we still do not have inflation.
In real life when we have increasing money supply ,velocity decreases actually.
What i am saying is that inflation is not so easy to increase as most people think.
When it happens it happens for other reasons ,other intermarket influences and most importantly expectations of traders and investors.
In these markets we have created ,misinformation is more important than the technicals and the fundamentals of the markets. We make the economy because we believe “them” ,whatever “they” say or because of our ignorance. Like what you said about Goldman Sachs advising to sell the gold. Governments’ and corporations’ and bankers’ most useful tools are the traders and investors themselves. We act against our ownselves and our own fellow human beings.
If we only knew that we can do the opposite using economy against “the powers”.
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So your analysis seems logical and we come to the same conclusions without thinking of anything other than usual. Not even QE. Only one difference in the analysis. The moves that may occur after the first half of 2013 may not be as much sustained and maybe gold will not reach 2500 etc. At least not because of logical inflation.
The primary tool is the mob and its ignorance of the real problems.
BANKING OVERLEVERAGING ,TOXIC ASSETS ,MONEY LAUNDERING OPERATIONS FOR BANKING DELEVERAGING THROUGH THE COUNTRIES’ DEBTS. ALSO THE LOCAL PROBLEMS OF THE COUNTRIES TO BE USED AS A PRIMARY REASON ,SO AS TO USE THE CRISIS AND THE REAL PROBLEMS OF THE BANKS AND THE CRIMINAL INSTITUTIONS ,AS A WAY AND AN EXCUSE ,TO PASS THEIR POLICIES TO THE COUNTRIES WHILE ACCUSING THEM INSTEAD OF THEMSELVES (BANKERS).
THAT DOES NOT MEAN THAT THE COUNTRIES DO NOT HAVE PROBLEMS AND DO NOT NEED REFORM. IT MEANS THAT “THEY” ARE OVERDOING IT WITH THESE COUNTRIES FOR THEIR OWN INTERESTS.
HYPOCRICY IN ALL ITS GLORY.
SO MOST AUSTERITY HAS NOTHING TO DO WITH THE REAL PROBLEMS. IT ONLY CAUSES MORE PROBLEMS FOR AS LONG AS “THEY” WANT TO AND FOR THEIR REASONS IN EVERY COUNTRY.
Thanks.