EU Summit & Basel Committee on Banking Supervision Meeting

Published: December 11, 2011
Article by: Josh Wilson, Senior Trader

Update on the Euro Zone Sovereign Debt Crisis

EU Summit & Basel Committee on Banking Supervision MeetingExcessive borrowing by lenders is often pointed to as one of the leading causes of the economic downturn that has plagued the United States, Western Europe and the rest of the world. In an attempt to reign in lenders from borrowing money that is not backed by worthy assets, most governments are instituting tighter leverage ratios.

If nothing else, these last few weeks have created some serious wealth opportunities in the financial markets.

With the back and forth negotiating over financial regulations and the last ditch effort to save the euro zone, the markets have seen increased volatility to recent highs. The VIX and VXX, which are indices that measure market volatility, have both shot up almost 8% in the last few days alone.  This last week’s events, combined with the coming weeks ahead will provide opportunities for those focusing on Price Action with institutions, hedge funds and other large investors squaring up positions to lock in bonus’s and reduce risk over the Christmas and New Years break.

Basel Committee on Banking Supervision Meeting This Week

The Basel Committee on Banking Supervision is meeting this week to discuss the exact leverage ratio, which at the moment is proposed as: the bank must have Tier 1 capital equivalent to 3 percent of its assets.

Former FDIC Chairman Sheila Bair is among the top names pushing for stricter controls. Chairman Bair claims that the U.S. needs to lead the way by enforcing restrictions above and beyond the 3 percent of assets.

Global regulators are split over the merits of a leverage ratio. The argument is that the leverage ratio acts as a limit on banks’ indebtedness and therefore reducing the total loans it can make to both businesses as well as consumers. However, estimates of the total decrease in annual GDP growth associated with the stricter loaning requirements can push equity markets down, and potentially strengthen the US dollar.

What You Need to Know about the EU Summit in Brussels

As if the banking regulations were not enough, the EU summit that is being held is seen by some as the last chance for the eurozone. The summit, held in Brussels, brings together the leaders of the EU countries for an emergency meeting in an attempt to pull the region out of its fiscal tailspin.

Leaders have been holding all-night talks in Brussels and have added ($267 billion) to the ECB warchest while tightening anti-deficit rules.  Moreover, there is a strong belief that things are getting incrementally resolved in Europe.

So what has led to swings in the EUR/USD? Much of this rhetoric about fiscal union comes from the offices of Angela Merkel, the Chancellor of Germany, and Nicolas Sarkosy, the President of France.   This comes on the heels of a looming credit downgrade by Standard & Poors of eurozone member states, including the two economic powerhouses of France and Germany.  The fear of a downgrade and concern that the Euro member states may not be doing enough has muted investor confidence in the Euro, leading to some of the larger intraday pullbacks we have seen in the Euro.

While the increase in volatility of the Euro has created plenty of trading opportunities, many are wondering if the United States will intervene in the European Debt crisis and what that could it mean for the US dollars strength.  Currently it does not appear to be an issue, at least for now. The International Monetary Fund, better known as the IMF, has said that it will continue to be “helpful” but that the main role in this crisis lies with the European Central Bank, also known as the ECB.  The IMF is a Washington-based lender that works closely with the US Treasury.

The IMF, however, may not stay sidelined forever.  Heading into the election year, Democrats do not want to be accused of committing public funds to the other countries given the current fiscal climate. In contrast though are the IMF’s statements that they can play a very helpful role in terms of funding as well as providing advice and independent objective public assessments of the progress of countries to curb their deficits.

Why This Matters For Forex Traders

Since the founding of the Euro in 1999, never has there been this much volatility in the currency.  Partially due to the interconnectivity of capital markets, even the smallest news can create turbulent moves in the financial markets.  With the world focusing on the events in Western Europe we have seen Price Action relative to news announcements hit an all-time high.

As usual, going forward I will be holding to the great insight of author Mark Douglas of Trading in the Zone, who said that “you don’t have to know which way the market is going to move to profit.”  There is no way anyone can accurately predict what will happen next, only that movement will occur.  At the FxST Professional Forex Trading School we believe that it is market movement that creates profit opportunities, so we are following this closely and enjoying the trading opportunities that the market provides us day after day trading Price Action.

Happy Trading,

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p.s.s.  Leave a comment and let me know what you think of it about the European Debt Crisis!

facebook comments:

to “EU Summit & Basel Committee on Banking Supervision Meeting”

  • George S on December 12, 2011

    Never heard of about the Basil meeting, thanks.

  • stephan on December 12, 2011

    euro collapse here we come haha

  • Michael on December 12, 2011

    Do you trade over Christmas holiday, Josh? This is my 1st year trading this time time of the season and wanting to know if it’s worthwhile to stick around to trade the market or just take the whole time off to enjoy with friends and family. Cheers!


    • Josh Wilson on December 12, 2011

      Hey Michael, I typically take the Christmas break off for a few reasons:

      First being volume is light and the Price Action is not a consistent as it is during normal market conditions.

      The second being that I think it is benificial to mentally disconnect from the markets from time to time. It personally allows me to come back from the break “Refreshed” and able to focus more on the details as the New Year starts.

      If anything, it’s also a great time to analyze your past results and set goals moving forward.

      Hope this helps!

      - Josh Wilson

  • Laura Chandler on February 14, 2012

    Great blog, interesting take on FX

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