The ECB shows it has no problem with making muppets out of traders ! Today's " surprise " ECB rate cuts ( main refinancing rate cut by 25 bps to 0.25 % , marginal lending rate cut by 25 bps to 0.75 % ) set up perfectly by Wednesday's alleged MNI " Sources " saying there would not likely be a rate change at today's ECB Confab ! Max pain / Max impact set by sending signals contrary to true intentions - Draghi has learned well from Ben Bernanke !

http://www.zerohedge.com/news/2013-11-07/stunning-move-ecb-cuts-rates-25-bps-euro-plunges

In Stunning Move, ECB Cuts Rates By 25 bps, Euro Plunges

Submitted by Tyler Durden on 11/07/2013 07:52 -0500

• European Central Bank
 
• Monetary Policy

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Perhaps it is not surprising that with the absolute majority of economists and strategists, or 67 of 70, predicting no rate cut by the ECB, this is exactly what the ECB just did, when in a stunning move it cute rates for both the main refi rate and the marginal lending facility by 25 bps, to 0.25% and 0.75% respectively. And there is your reaction to Europe's encroaching deflation.

From the ECB:

At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:

The interest rate on the main refinancing operations of the Eurosystem will be decreased by 25 basis points to 0.25%, starting from the operation to be settled on 13 November 2013.

The interest rate on the marginal lending facility will be decreased by 25 basis points to 0.75%, with effect from 13 November 2013.

The interest rate on the deposit facility will remain unchanged at 0.00%.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today.

The Euro will need a bigger chart to show just how far it tumbled as a result of the stunner:

But... But... that MNI source yesterday said...

And now, tune back in in 40 minutes for Draghi's press conference.

http://www.zerohedge.com/news/2013-11-06/sources-confirm-no-ecb-rate-cut-tomorrow-euro-soars-pushing-dow-jones-new-record-hig

"Sources" Confirm No ECB Rate Cut Tomorrow, Euro Soars Pushing Dow Jones To New Record High.

Submitted by Tyler Durden on 11/06/2013 10:00 -0500

• Equity Markets
 
• European Central Bank
 
• Eurozone

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Even though a meager 3 of 70 economists actually expected Mario Draghi to announce some sort of rate cut at tomorrow's ECB press conference, moments ago MarketNews reported that according to "sources" a rate change tomorrow is unlikely even amid a dip in Europe's inflation.

MNI Eurozone @MNIEurozone

ECB SOURCES: RATE CHANGE THURSDAY UNLIKELY EVEN AMID INFLATION DIP

9:53 AM - 6 Nov 2013

Bloomberg adds:

• MarketNews report cites senior Eurosystem source as saying ECB will want to avoid over-reacting to fast-changing economic signals and avoid Fed Taper error.
• Report cites senior Eurosystem source as saying ECB will want to avoid over-reacting to fast-changing economic signals.
• ECB does not make “hasty moves or take decisions with  short-term value,” report cites source as saying; said Fed announced plan to start tapering QE “too early”

The flashing red headline, as this non-news was picked up by the algos, was enough to send the EUR, and naturally the all important EURJPY spiking by another 40 pips, and taking the correlated US equity markets, right along with it pushing the Dow Jones to a fresh record high.

And that concludes your "fundamental trading" lesson for the day.

Did the ECb decision come down to euro appeciation ? 

http://www.zerohedge.com/news/2013-11-06/bofa-warns-further-euro-appreciation-problem

BofA Warns "Further Euro Appreciation Is A Problem"

Submitted by Tyler Durden on 11/06/2013 15:01 -0500

• European Central Bank
 
• Greece
 
• HIGHER UNEMPLOYMENT
• International Monetary Fund
 
• Ireland
 
• Italy
 
• LTRO
• Market Conditions
 
• Portugal
 
• Unemployment

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With only 3 of 70 economists surveyed by Bloomberg expecting a rate cut at tomorrow's ECB press conference, Credit Agricole's Frederik Ducorzet suggests seven signals to watch for from Draghi that could signal ECB easing ahead. Crucially, as BofAML puts it, "further euro appreciation is a problem, particularly for the periphery," and with empirical Phillips curves in hand, there is little room for further compensation via wage reduction. In other words, if Draghi stands pat (or doesn't offer up some sacrificial forward guidance hint of easing being likely), the drumbeat of social unrest in the periphery will grow ever louder.

These 7 signals should be watched for carefully, according to Credit Agricole's Frederik Ducrozet, as hints that further ECB easing is on its way...

For ECB refinancing rate cut to be delivered in December, following conditions need to be met:

1. Explicit hint about rate cut discussion if asked whether decision was unanimous

2. Signal may be conditional on Dec. staff forecasts

3. Hint toward likely shift in balance of risks to price stability/reference to FX and oil prices on inflation

4. Keeping deposit rate at zero

Draghi may become more explicit on ECB’s liquidity plans:

5. Explicit reference to LTRO, reduction in reserve requirements or suspension of SMP sterilization may have greatest market impact

6. Market may be disappointed if ECB says it remains attentive to money market conditions without more details

7. Easy solution would be extension of fixed-rate full allotment regime in 2015

Which is crucial, for a s BofAML notes, while the euro is not overvalued, it is close to the upper end of its equilibrium range. Therefore, the euro area can afford a stronger euro, but not a much stronger euro. However, their evidence suggests a much lower euro threshold for the periphery, with little room to compensate with wage reductions.

Our estimates suggest that a further euro appreciation by about 3% in real effective terms would bring the currency to the early stages of an overvalued territory.

Moreover, the strength of the euro this year has already started offsetting the periphery's competitiveness gains, which the region achieved during a painful adjustment in recent years.

The chart above shows equilibrium estimates for the euro area and selective member countries, using the IMF's CGER methodology, which combines a number of equilibrium measures. According to our estimates, the euro is currently overvalued by about 7%.

However, our estimates also suggest that the euro could soon become overvalued if it continues appreciating. Moreover, the euro is already overvalued (beyond the ±10% range) from the point of view of Greece, Ireland and Spain. And PPP estimates suggest that the euro is overvalued by 20% against the USD.

The periphery cannot afford a much stronger euro

The strength of the euro is partly offsetting the competitiveness improvements that the periphery has achieved in recent years. Our estimates suggest that the euro is already too strong for Greece, Ireland and Spain, but within the equilibrium range for Italy and Portugal.

The Phillips Curve for euro-area economies has flattened substantially, which could make rebalancing more difficult, as countries require much higher unemployment (or output gaps) to achieve the same price adjustments. As wages are less reactive than before, peripheral countries need persistently high levels of unemployment to achieve rebalancing through wages.

In our view, there is little room to keep pushing through that route in countries with overleveraged households.