European Sovereign Debt Crisis Forces Top Central Banks to Cut Borrowing Costs

Published: December 1, 2011
Article by: Josh Wilson, Senior Trader

What Caused the Sharp Decline in the US Dollar?

Fiscal policy makers, especially those in Western Europe and North America, have been incapacitated trying to appease their constituents who call for a reduction of the mounting debt burden and simultaneously stimulating stagnant economic growth. In the meantime central bankers, for better or worse have been acting alone.

The coordinated news releases on Wednesday November 30th, 2011, by six central banks appear, in the short run at least, to have boosted worldwide confidence.  The Federal Reserve, the Bank of England, the European Central Bank, The Bank of Japan, the Bank of Canada and the Swiss National Bank announced that they would reduce the cost by which banks in foreign countries could borrow dollars from their own central banks by 50 basis points.  This move is a coordinated effort by central bankers to stop the debt crisis contagion from spreading to other European countries.

Immediately after the news the markets began a rally that was among one of the largest yet with The S&P 500 and The Dow both gaining over four percent.  Unfortunately all does not seem rosy.  Skeptics have already begun to wonder, “what about this move is any different than any of their previous moves?”  Moreover, some claim that the central bankers are only treating the symptoms of European financial crisis and therefore this rally could be very short lived.


What You Should Know about the European Debt Crisis

For those who have been asleep at the geopolitical-wheel and need a quick euro zone debt history: In November 2008 a small group of European leaders convene in a secret task force so secret it was dubbed by its own members as “the group that doesn’t exist.” Their mission was to create and begin to implement a plan to stave off a possible default of Greece. A year later when Greece publicly ran into trouble the group still had no strategy. Investors, stunned by the large Greek budget deficit, began to dump Greek bonds leaving Greece to deal with daunting debt repayments.

In late April 2010, then Greek Prime Minister Papandreou publicly asks the EU for aid. When Germany and France finally agreed to the first round of bailouts the markets began what would become a series of central bank interventions which has added unprecedented volatility to the financial, and especially Forex, markets.

The current move by the collection of central bankers to fix the euro zone debt problems come at a time of increasing pessimism on the future of the Euro.  As an example, The Financial Times headline on Tuesday November 30th was “Businesses plan for possible end of Euro.”  Moreover, The Economist front page is a picture of a flaming Euro with the phrase “Is this really the end?” In a statement the Fed released on Wednesday it said:

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.”

As with all central bank actions, there will always be dissenters and skeptics. Many begin by saying that at best what the central bankers did was lower the borrowing rate with which banks could borrow dollars, however if a bank needs to borrow from the central bank that is already a bad sign.

How to Profit From Unexpected News Announcements?

Finally, how do we as traders take advantage of this? Two words: Price Action.

Long Term Successful Traders all understand a key concept that Mark Douglas extols in his book Trading in the Zone, “you do not have to know which way the market is going to move to profit.” As long as the market is moving (more movement the better), opportunities will appear as the market continues to evolve .

At the FxST Certification School we teach traders about “Situational Trading” and how being on the leading edge of Price Action can increase your profit opportunities and minimize your risk during unexpected events like Wednesday. I would like to invite you for a personal 1-on-1 walk through of the FxST Trading program with one of our Professional Forex Traders.

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Don’t forget tomorrow is Non-Farm Payrolls, so be prepared to take advantage of the Price Action! Stay focused on minimizing risk and the rewards will follow.


Happy Trading,

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