The euro traded slightly higher against the US dollar as a result of speculation surrounding a Der Spiegel article that surfaced during the session. ?According to the infamous German magazine, European Central Bank officials were mulling over a potential bond yield cap for indebted EU members, with particular emphasis on Spain and Italy. ?The decision would be ultimately made in September ? a month when some traders are expecting another rate cut of 25 basis points by European policymakers.
Although potentially effective, the measure is unlikely to materialize for more than a handful of reasons.
Germany, for one, will continue to remain a staunch advocate against a potential bond buying scheme.? German officials, from the beginning, have been vehemently against any type of asset purchase measure as it would increase the specter of future inflation and add sovereign debt to the region?s balance sheet.? Policymakers are no doubt making comparisons to the Federal Reserve in the US, which has amassed a total balance sheet of about $2.9 trillion in assets.? This is a little more than 3 times the amount seen before the onset of the financial crisis in 2007 and is definitely worrisome for Bundesbank policy heads.
The same policymakers would also question whether or not the European Central Bank even has the power to overstep its mandate of price stability ? and move into sovereign maintenance territory.? Although the European Central Bank may ultimately find a workaround to purchase short dated securities or issue loans, it may not possess the lawful ability to buy short and medium dated securities ad infinitum.? Such a move would have not only German, but other more fiscally conservative member countries like Finland questioning the constitutionality of the ECB?s decision.
And, finally, the logistics of a plan could be more than ECB bankers are willing to take on.? Should the European Central Bank decide to implement a bond yield cap, central bankers would not only decide the appropriate adjusted yield for Italian and Spanish bonds (as well as other indebted nations) but also how to effectively deal with speculators.? The Swiss National Bank has been in a similar situation, defending a domestic currency peg with the Euro.? However, the Swiss franc market is smaller when compared to the Euro, and that could cause a lot of headaches and foreign exchange losses for the central bank.? Not to mention, if benchmarks are set and the ECB fails to defend, the monetary body could lose all credibility in the market.
Although the measure could potentially be good for the Euro and the EU, the likelihood of such a plan coming to fruition is next to nil.? Political and monetary scenarios, as well as Germany, are likely to make sure of that.? As a result, even more focus will now be placed on the ECB?s September meeting in weighing the single currency?s short term future prospects.? But, for now, expect a bit more range bound trading as we head into the tail end of the summer.
Tags: ECB, Euro, European Central Bank, European Euro, Foreign Exchange, Forex Commentary, Mario Draghi
Source: http://www.onlineforextrading.com/blog/germany-wont-let-ecb-yield-cap-pass/
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