November 22, 2009

"Liquidity is the drug

There was little out in terms of data overnight and it appears that the FX market continues its positioning-cutting/profit-taking heading into month-end. There were some important comments, however, from various ECB policy makers (Trichet, Weber and Bini-Smaghi) overnight.The most interesting of these were from ECB President Trichet, who spoke of the role central banks have played in containing contagion in the global financial market, comparing the crisis management and enhanced credit support to 'emergency medicine.' However, he went on to say that 'if their use is prolonged, they can lead to dependence and even addiction. Eventually, the administration of painkillers must be stopped if patients are to get back on their own two feet.' He also hinted that once the decision to withdraw liquidity is made, various non-standard measures will be unwound in a gradual manner to prevent what he called 'withdrawl symptoms'. He observed that “it is too early to declare the crisis over”, especially since the private sector must understand that enhanced credit support would not last forever. The recent profit-taking notwithstanding, our view has been that risky assets can rally further as policy makers appear unlikely to change their ultra-loose policy stance and unlimited liquidity in the near term. It is clear from Trichet's comments that the ECB isn't quite there yet in curtailing its liquidity measures"

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