Forex Trader Top 3: ECB Backtracking, Fed Rate Cuts, Rice

Mark Whistler is the founder of and is the author of multiple books on trading. Mark’s newest book, The Swing Trader’s Bible – co-authored with CNBC/Fox News regular guest Matt McCall – will be on shelves in late summer, 2008. In addition, Mark also writes regularly for and

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1. ECB’s Noyer Backtracks

The News:

Monday afternoon, ECB member Noyer backtracked on previous rate hike comments, in an interview with the Wall Street Journal.

The Breakdown:

Comments from ECB and FOMC policymakers have been the main catalyst in the euro rally lately, helping to push oil to highs.

On Saturday, ECB member Axel Weber told the press, “I am concerned that, with regard to the conduct of wage and fiscal policy, the recent temporary heightened inflation rate could be consolidated for longer than is necessary above the tolerance level of the Eurosystem.”

On Tuesday, ECB members Noyer and Mersch both made rate-hike-related comments, with Mersch telling the Financial Times the question of a rate hike is ‘fully justified.’

After the euro posted a new all-time high Tuesday, Noyer then spoke to the Wall Street Journal again in the afternoon, saying the market had misinterpreted his comments. The WSJ wrote:

Earlier Tuesday, Christian Noyer, France’s central banker, told French radio network RTL,

“Our big problem is to ensure that inflation returns below 2% next year. We will do whatever is necessary for that. If needed, we will move interest rates.”
That comment, along with other hawkish-sounding words from other ECB policy-makers, helped spark speculation of the ECB’s next move might be to raise interest rates to tame euro-zone inflation.

But in a Wall Street Journal interview later Tuesday, Mr. Noyer said markets had over interpreted his remarks as a hint about the direction in which rates might move.

“Movements can go both ways,” he said. “I would never engage in a discussion about the future path of interest rates, simply because nobody knows. It would be dangerous to make predictions in either direction.”

The Bottom Line:

Traders need to listen to economic news, not ECB members who probably shouldn’t be so carelessly talking about rates.

2. Fed Fund Futures Point to Quarter Point Rate Cut

The News:

As of Wednesday, Fed Fund Futures were pointing to just over a 90% chance the FOMC will cut the Fed Funds rate by 25-basis points next week.

The Breakdown:

Traders are currently pricing in a hefty probability that the Fed will cut rates next week, bringing the target rate down to 2.0%. However, with oil recently posting new highs, just under $120 a barrel and commodities kicking up inflation concerns, the FOMC may actually surprise the market by staying pat.

While an interest rate cut would help ease credit markets slightly more, holding rates steady at this time could actually be a more healthy alternative. Last week, OPEC’s President stated that the cartel would not increase production, commenting that the declining dollar is actually one of the main catalysts behind the rise in price of oil. For every 1% the dollar drops, oil rises $4.

If the Fed were to hold rates steady at this time, the dollar could see a near-term rebound, which would likely bring oil back to $100 a barrel, or lower, which in turn would help ease commodity prices and inflation.

The Bottom Line:

The FOMC needs to think twice about cutting rates one more time, as simply leaving the Fed Funds rate where it is now might actually be a more effective solution.

3. Rice Hits All-Time High

The News:

In Asian trading two days ago, rice hit a new all-time high at $24.745 per 100/lb.

The Breakdown:

For 2008, rice has climbed just under 70%, fueled by the broader commodity rally and supply shortages in Asia. What’s more, with India and Vietnam already implementing export tariffs and protective trade policies, prices could climb even higher.

Case in point, the BBC reported, “Curbs are in place in India and Vietnam to protect domestic supply and there are fears that Thailand, the world’s largest producer, could follow suit.”

The Bottom Line:

If the U.S. dollar rebounds, the price of oil would likely cool some, thus allowing agricultural commodities to ease as well. However, with global demand increasing daily – and with many countries continuing to implement protective export tariffs and curbs – prices could still have plenty of upside left.