Policy On Hold And Jawboning The Euro Is The Only Option Open To The ECB At This Point

Well, earnings season started with a bang last night as Alcoa (AA) delivered….errr…..actual earnings. Both operating and GAAP earnigns comfortably exceeded the consensus; while cost-cutting undoubtedly played a major part in the beat, it’s also true that top-line revenues actually rose, defying the usual seasonal trend. (2002 was the last year that Q3 revenues exceeded Q2.) At this point, it would probably be churlish to point out that that 9% rise in revenues came in a month when aluminum prices actually rose 14%….

In any event, risk assets have unsurprisingly registered a solid performance overnight, and the DGDF crowd has gone to town in Asia. That trend will come under a bit of scrutiny today when Trichet conducts his post-ECB press conference.

Europe has been unusually vocal in complaining about both the strength of the euro and weakness of the dollar (and its Bretton Woods II parasitic hangers-on), so it will be interesting to see if they are preapred to do anything about it. Yesterday, The Boy Who Cried Wolf evidently produced a report suggesting that Europe is mulling some sort of policy prescription.

At the same time, however, money is draining out of the European money market as the take-up of new tenders has been miniscule. Given that EONIA has traded far, far through the ECB policy rate, this would imply decent upside to euro money-market rates. The euribor curve has started to tick lower, helped by heavy liquidation of call structures, presumbly by a fund well-known to be well-connected in the halls of Frankfurt.

Despite, this, much of the curve is still well higher (i.e., implying lower rates) than was the case just a month ago.

At this point, it’s difficult to see the ECB changing policy. The market (both money markets and equities) are suggesting that further limitless amounts of liquidity aren’t really needed. Yet if they try to guide cash rates higher, they might find that the euro goes much further than they would like. Unilateral intervention would likely prove ineffective, and multilateral intervention simply isn’t happening. So really, policy on hold and jawboning the euro is the only option open to the ECB at this point.

So when Jean-Claude Trichet opens his press conference by wishing us all a good afternoon, Macro Man plans to reciprocate and wish him a good moaning.

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