ECB Sparks Fear

The short term nature of holiday markets was proven once again on Wednesday. As volumes continue to decrease the EUR suddenly found itself on its heels against the USD as tough questions could not escape the European Union. The GBP and AUD both shadowed the EUR and went lower against the USD. The JPY lost a touch of ground to the Greenback also, but remains in a fairly well tuned range. The results from the new ECB lending program, which allowed banks to borrow cheap money for a 3 three year period with nearly zero interest rates proved successful yesterday - too successful. European banks reportedly borrowed almost half a trillion EUR on Wednesday which set off alarm bells in investment offices globally. Also making its way to the floor were extremely ugly Existing Home Sales numbers from the States which not only missed their monthly mark, but saw downward revisions via reports dating back to 2007 – not exactly promising bright outcomes to follow.

The fact the ECB lent out so much money to struggling banks in an effort to create better liquidity raised eyebrows. This because it is doubtful these banks will use the money for anything but to try and create stability for themselves. And the question is what will happen if and when Sovereign Debt from the likes of Greece has to finally be written off and others nations follow down that path. Also a glaring question exists regarding how the ECB exactly had half a trillion in cash to lend. Did the ECB print money? Did the ECB sell Gold? Thus investors are now faced with the prospects of going into increasingly thin holiday markets via vanishing volumes and having to consider once again the extent of the problems that Europe will face in the New Year.
The EUR gave up its gains made in the previous two sessions and going into today’s trading should be watched closely.

There is no doubt that we are full bore into the holiday season. Today’s trading will be light and tomorrow’s will nearly vanish as the day passes. Then the markets will essentially be closed for a long weekend as Christmas is celebrated by many nations. Investors may return on Tuesday, but most will not really come back to their desks until after the first week of January. Thin volumes will create very calm ranges, but traders must note that a ‘top heavy’ order that lands in the Forex markets could cause a sudden burst of energy and make some scratch their heads as they try to figure out why correlations appear to be nil. The USD continues to stand tall as a safe haven asset and it will keep this hat on going into the next few months if the E.U. continues to face difficult questions.

Today the U.S. will release weekly Unemployment Claims, Final GDP numbers, and see a Consumer Sentiment outcome from the University of Michigan. However, it must be remembered that many investors have ‘left the building’ and these reports may fall on deaf ears. Tomorrow Core Durable Goods Orders figures will come from the U.S., but even more so than today, with light trading the report may not have much of an impact. Gold is trading near 1610.00 USD as of this morning. The precious metal came off of its short term highs quickly when the EUR began to face renewed pressure yesterday.

The key to holiday trading is to follow short term trends. Traders must take into account that values are trying to find counterweights frequently under these holiday conditions and that not all ranges will make the most of sense. Traders can take advantage of light volumes in calm markets but must also be aware that sudden fluctuations can occur.