This is a question that just got (even) harder to answer as of today. The European Central Bank’s President, Mario Draghi, has announced today the ‘bazooka’ that (almost) everyone hoped he would announce.
After all, last December Draghi failed to promise more QE measures, so the market was disappointed and the EUR rallied as a result of that. Today, Draghi did deliver. He pushed negative deposit rates from %-0.10 to %-0.40, he boosted QE from 60 billion euros per month to 80 billion, and he announced that, for the first time, the ECB will include investment-grade euro-denominated bonds of non-financial companies as assets qualified to be under ECB’s QE.
This sent the EUR down and the markets up. Sharply. That was until Draghi said, 45 minutes later, the forbidden words: he was not expecting the ECB to cut rates further down – although he did say ‘but facts can change’. The markets didn’t hear this last part, though. The EUR went back up against the USD and the GBP, and very violently so, and the markets turned red. The DAX crashed 500 points in no time, showing how Draghi’s press conference managed to undo the effect of the ECB’s measures.
What should investors make of this? The first point to note here is that financial markets are extremely volatile, trading more on central bankers’ words than on fundamentals or technical patterns – and, for traders, that requires special caution. The second obvious point to note is that, regardless of Draghi’s words and how the market reacted to them, the truth is that the ECB has announced a truly massive and unprecedented QE program in Europe. This needs to be understood in context: the ECB had said that it was forecasting an inflation of 1% based on its previous measures, but the eurozone is registering an inflation of only 0.1%. So, in order to fulfill its goals, the ECB can only push rates further down and QE further up to unleash inflation and counter current deflationary trends – which are global, not just European.
So what can we expect of the EUR, and how can traders ride these very violent waves, namely on the forex markets? Ridge Capital Markets believes that the many factors that are likely to push the EUR down cannot be ignored – so let’s look at them.
1. First of all, the eurozone economy is not anemic – it’s severely ill. With ever higher taxes, ever higher regulation, extremely high unemployment, including for the younger members of European societies, huge debt loads, ultra-leveraged banks and aged demographics, the eurozone is a ticking time bomb.
2. Add to it the present refugee crisis and how it will not only put further pressure over the highly indebted governments’ budgets – for the social support that will be needed to support these people –, but also generate even more cracks on the Schengen wall, and you have a powerful accelerator of its explosion.
3. There’s a political crisis that is not ending in Spain, a new government in Portugal that is about to get its debt rating right into the trash can (literally), Greece descending even more into economic and financial hell, Italian banks with massive leverage and low capital threatening to burst, and Deutsche Bank (DE:DBKGn) being openly talked about on the markets as being near a serious shock (having an exposure to financial derivatives of about 54 trillion dollars, which is saying a lot if you consider that the world GDP is in the 70 trillion region).
4. Let’s not forget about ‘Brexit’ and the impact it can have on the EUR. Sure, the GBP will suffer temporarily if ‘Brexit’ really does happen – but the EUR is far weaker and can suffer more from that violent shock than the GBP.
5. Plus, the currency wars are just getting started. Now it was New Zealand’s Central Bank turn, and, in this game, all other central banks need to play along and keep bringing their currencies down – just as they have been doing, but even more. The BOJ will keep monetizing its debt until it blows, and even the Fed will feel an increasing pressure to go back to QE.
So, considering all this, forex investors are likely to make money by shorting the EUR. Here, we believe that traders should trade this currency following the old Wall Street adage of ‘sell the strength, buy the weakness’.
Ultimately, Ridge Capital Markets believes that the best way to go when it comes to forex trading and the EUR in the short-term is to ask the right questions and trade on them. The EUR rallied impressively today – but how can that last? So sell its strength. The ECB’s QE program will likely seem insufficient again in the coming months – so the EUR may rally again temporarily until Draghi announces something else. So sell any temporary strength that the EUR may show. On the other hand, if the USD is temporarily weak, at least until the Fed makes its next move – buy its weakness. If something else happens and the USD faces yet another short-term correction, buy its weakness.
There is a lot of turmoil likely coming. Which currency do you think the world will want to hold – the EUR or the USD? Trade accordingly.