Trading Strategies

The European Central Bank (ECB) conducts two meetings of its General Body in a month. The
meetings are aimed to discuss the current trends in the economy and then drafting monetary
policies based on them. The business discussed in these meetings is later briefed in the press
conference by the Chairman. The last meeting was held on 7th March 2009 and the preceding on
24th January 2019. Sager and Taylor (2004) observed that the outcomes of meetings of Central
Banks impact financial market operations. Traders use the information to make/change their
strategies. For example, information related to interest rates and sanction of loans to commercial
banks are sensitive to the market, more inflow of funds to the economy leads to a bullish
environment. The aim of the essay is to identify what trading strategies can be implemented to
attain our desired investment goals. Based on the analysis of the past few meetings it argued that
whipsaw trade strategy is applied. This essay will cover an analysis of ECB’s path up to the
current meeting; the key factors considered by ECB to make their decisions and identification of
a different possible scenario that should happen as against what will be going to happen.

ECB is the central bank of the European Union where its monetary policies are implemented in
19 member countries. Due to the economic slowdown, Brexit, US trade wars with China and
Trump’s attitude of rescinding from trade agreements, the economy of the EU is under a little
stress. One of the risks to the European economy is China dumping its discounted goods that are
made for the US market if any deal between the two nations is not finalized (Ponthus &
Carvalho, 2019). This will hamper the domestic industry, further, there is a fear of imposition of
tariffs on European goods by Trump administration. To make the economy resilient to these
factors, the Central Bank make policies to regulate the economy. So far, the objective of the past
series of meetings and upcoming meetings will be price stability. This requires assessment based
on economic, inflation and macroeconomic outlook (ECB, 2019). The key economic indicators
are GDP growth rate both at the aggregate level and industry wise and inflation rate. Besides,
there are other indicators as well like geopolitical risk, labor wage rate, level of debt in the
economy, balance of trade and unemployment rate. These factors are monitored and reviewed
every 6 weeks.
 Objective: Price
Stability
Through

Latest
Economic outlook Inflation Outlook Macroeconomic
Projections

Figure 1: Objective of the meeting of the General Council

From the last two meetings, interest rates are not changed. The inflation rate is low; it is targeted
to remain lower than 2%. Inflation is likely to remain muted as the economic momentum has
been lost for quite a time now. However, it is likely to grow in the mid-run due to two important
factors: a rise in wage rate and economic expansion. The forecast looks over-optimistic at this
level as no substantial reasons for it was given by the council. The inflation rate for the month of
January was 1.4% and for February was 1.5%. Annual inflation forecast is 1.2%, 1.5% and 1.6%
for Year 2019, 2020 and 2021 respectively. The risk of geopolitical factor is very high, Greece is
facing its fifth recession in the last 20 years, Germany is also witnessing low export revenue due
to global economic slowdown, Italy is participating in China’s initiative to build a road and port
network across Central Asia, the Middle East, Africa and East Europe (Elliott, 2019). Further,
the situation of commercial banks is not good, two big German banks Commerzbank and
Deutsche are in talks of a merger. There is disagreement among the leaders too, French president
Emmanuel Macron wants a closer integration of EU’s economy by making its own Finance
Minister but Germany opposes it as poorer EU countries would benefit from Germany’s
taxpayers.

Period GDP Growth rate Inflation Rate

2019 1.1% 1.2%
2020 1.6% 1.5%
2021 1.5% 1.6%
Figure 2: ECB forecast for GDP growth and inflation rate.
ECB believes that the current financial conditions are supportive, labor markets are favorable
and the wage rate is increasing, together these factors will contribute to economic expansion
(ECB, 2019). Interest rates are not changed for quite a long period, these are 0%, 0.25% and -
0.40% for refinancing, marginal lending and deposits respectively. These are expected to remain
at the same level throughout 2019. ECB is receiving principal payments from its investments and
reinvesting them while maintaining liquidity. ECB has mentioned in the recent meeting that the
third series of TLTRO will be issued from Sept 2019 to March 2021for a period of 2 years.
TLTRO is a kind of loan given to commercial banks by ECB so that they can lend the money to
non-financial borrowers who in turn put the money into the economy to insulate the economic
cycle. On asked by a journalist the reason for such short duration The President, Mario Draghi
answered that TLTRO’s design is influenced by a lot of factors like the situation of banks over
next few years, the maturity of old TLTROs and various regulatory compliances, however,
precise reasons for reducing TLTRO’s period was not given. It was also mentioned by the
President in the press conference that TLTRO has boosted small and medium businesses.
However, loans to non-financial corporations are declining. It declined by 3.9% in December
2018 and 3.3% in January this year, on the other hand, housing loans increased by 3.2%.

ECB stimulates
Economy
Through

APP
Interest Rates TLTRO
Reinvestments

Figure 3: Key tools to stimulate the economy

Financial Markets are influenced by a lot of factors including demand supply, international
transactions, the economic situations, government, and its monetary policies. The monetary
policies are very important as they highlight the key issues going on in the economy and later the
measures taken by Government to counter those adversaries. For instance, if the Government of
a country identifies that due to lack of capital domestic it has become difficult for domestic
business to continue their operations and are exposed to a tough competition from foreign
companies then the Government may decide to cut repo rates or interest rates so that lending can
be done easily. If the conditions are worse than the Government may provide loans to
commercial banks so that they can lend to the businesses. When this money is infused into the
economic production takes place, people buy goods pay for services and sales of businesses
increases. The effects are long-lasting, to make the situation different, when there is huge
inflation in the economy government increases the interest rates so that purchasing power is
reduced and demand for goods and services decreases. Low demand will drop down the market
equilibrium to a lower level, this controls the inflation in the economy. More loans mean
businesses will grow, it points towards bearish attitude. High-interest rates implied low
purchasing power, a high cost of borrowing to the investors, therefore, bullish attitude.

Forex market is the most affected market due to monetary policy change. In the case of ECB
whenever it announces decisions regarding any of interest rates, term loans to commercial banks
or reinvestment of securities, the exchange rate of Euro with all major currencies fluctuate. The
announcements of ECB are not good for the economy, low-interest rates and GDP growth rates,
declining in loans to non-financial companies, however, plans of ECB to infuse commercial
banks with more funds is positive news but most of the news will going to have a negative effect
on the exchange rates. What generally happens in such situations is that the price moves in one
direction just close to the beginning of the meeting and as soon as the outcomes are known to the
public at large, the prices move very strongly to either direction. The degree of such leap in
prices depends upon the gravity of the outcomes of these meetings. Later over a period, the
prices come down in the opposite direction. This opens up the scope to earn a profit. Buying long
when the prices are building up and selling when The investor do two trades simultaneously,
enter one transaction long and one short. These shall be close to the middle price range. The
strategy is called a whipsaw strategy. It ideally works when the price range before such
announcements are very narrow.
 Figure 4: An example of whipsaw strategy. Source: Stockchart.com

Striving for profit only involves risk, to mitigate its strategy of diversification can be used. The
investor should invest in all currency pair of Euro so that the risk can be minimized. This
strategy requires deep and careful analysis. The investor needs to know the correlation between
various such currencies to predict their movements. In order to hedge investments or to gain
from lesser investments, the investor can enter into any future or options segment. Before such
meetings investor should try to forecast the possible outcomes and their possible impacts on the
stock price. If the markets are behaving in a different direction, then the investor shall enter into
any of future or forward contract. However, the uncertainty is very high in this case, a minor
mistake in anticipating market movements can cost serious damage.

The projections made by ECB are very optimistic with respect to GDP. Current GDP growth rate
is 0.2% only whereas the projections are 1.1% in 2019, 1.5% in 2020 and 1.6% in 2021. There
was not much justification for these anticipations. The way GDP has performed in the past does
not make these projections in line with the trend. However, the third series of TLTROs can make
a difference. The infused capital is supposed to boost domestic business which will contribute to
high GDP. The ECB has already issued two series of TLTROs already and they have already
contributed to high risks for the banks. The interest rates are not changed this time as well.
Deposit rates are in negative for a very long period. The economy is hungry for investments; the
Central Bank should have altered minutely to the interest rates. If interest rates on lending are
reduced more then it will support other factors like favorable labor markets. TLTROs shall be for
the same old duration of 4 years instead of 2 this time, further, the date of issue is not yet
finalized. The decision will be taken in the next meeting. This will lead to more delay, as
geopolitical factors are against, timely action is very necessary. More measures should have been
taken to address the geopolitical risks.

ECB conducts such meetings from time to time. The importance of these meetings is very high,
it gives insight into the current scenario of the economy. Policies to counter adversaries are
made. The outcomes of the meetings are useful to many users. Investors are also a user of this
information. They plan their investment strategies accordingly. The last meeting of ECB was
conducted on 7th March 2019. The main focus of the bank was to keep the price stable so that
economic growth can be achieved and employment be provided to the people. ECB has taken
various measures. GDP, inflation rate forecasts are revised, reinvestment and new term loans will
be given to the commercial banks. These meetings give an opportunity to the investors to earn
profit due to volatility and fluctuations that take place near such meetings. The best strategy that
ensures maximum profit under such situations id whipsaw strategy. The second one that can be
preferred is diversification. Short term profits can be made from these strategies. The projections
and directions ECB is going is alright but does not look to be the best. There is already too much
stress on the banks, providing them funds will decrease the short term risk but increase long term
risk of solvency.
References
ECB, 2019. Meetings of the Governing Council on 7th March 2019. [Online]
Available at:
https://www.ecb.europa.eu/press/pressconf/2019/html/ecb.is190307~de1fdbd0b0.en.html
[Accessed 3 April 2019].
Elliott, L., 2019. The European Union has bigger problems to deal with than Brexit. [Online]
Available at: https://www.theguardian.com/business/2019/mar/24/the-europe-union-has-bigger-
problems-to-deal-with-than-brexit
[Accessed 4 April 2019].
Ponthus, J. & Carvalho, R., 2019. Trade wars: We're next, European investors fear. [Online]
Available at: https://www.reuters.com/article/us-usa-china-talks-eu-analysis/trade-wars-were-
next-european-investors-fear-idUSKCN1PO0E3
[Accessed 3 April 2019].
Sager, M. & Taylor, M., 2004. The impact of European Central Bank Governing Council
announcements on the foreign exchange market: a microstructural analysis.. Journal of
International Money and Finance, 23(7-8), pp. 7-81043-1051.