Demand for 10-Year Treasuries has increased of late, sending the dollar into a rally against all the other majors. The greatest impact of this surge, however, has been borne by the euro, falling nearly 400 pips in the last three weeks of active trading. There is no new war to speak of or spate of risk aversion that might resurrect safe havens. The dollar is actually improving because economic results have been better than in other arenas. The euro has succumbed, too, but the driver in this region is the inimitable Presario of the ECB, none other than Mario Draghi.
When last we witnessed his previous 5-star performance, we heard him remark, “I would say that the Governing Council is comfortable with acting next time but first we want to see the staff projections.” One can only imagine a cadre of analysts running about in the bowels of the ECB, attempting to update spreadsheets that have been viewed a thousand times. Will we see demonstrable action taken this time around, or paralysis of analysis, full of sound and fury, but signifying nothing?
The market, however, is tiring of this multi-act play. It is simply saying get on with it or take the consequences. The general expectation is that a rate cut or some other “conventional or unconventional means” will finally be announced next week, but, again, only after reviewing those all-important staff projections. If we only need the staff projections, then why do we need the song and dance routines from their superiors? A current chart depicts how the market can meet out justice when actions are illusory:
This “M” or “Double-Top” formation is prevalent in several of the major pairs, but most other currencies have not penetrated the Kumo Cloud fully or breached the 100-Day EMA, for that matter. The euro, however, is in freefall at the moment; stuck between two advanced Fibonacci levels, with nowhere to hide. It may choose to range a bit at this point in anticipation of Draghi’s pronouncements next week, but that behavior would be in line with custom. The market is disgusted with custom. More downside could occur, especially if hints and rumors abound over the weekend or early in the week.
Economic news has not been favorable either. Unemployment increased in Germany, never a good sign, and other members of the ECB seem to be telegraphing an imminent change in policy direction while attending to their various speaking engagements. At times like these, reporters tend to root around in the ECB shrubbery, searching for those last few nails to put in the coffin. Two reports have surfaced that may prevent the need for staff projections. One highlights that banks in the region have been holding back on lending to the business sector for the third month in a row.
The second report, however, is more disconcerting. For the past eighteen months or more, investors have pushed a seemingly endless flow of capital to Europe, buying up bond issues that once had been highly suspect. The prevailing low-rate environment has created a global chase for yields. Emerging countries have suffered from quick exits, when the next better yielding asset came along. Draghi has actually warned investors that their newfound confidence in periphery bond issues might be a bit ahead of the curve. In the ECB’s bi-annual report, they hint at the possibility of a bubble brewing in financial markets.
It might be difficult to view Europe as nothing more than an emerging market economy, but if one country’s default whistle is blown, the stampede for the exits could be horrific. We might actually see parity with the greenback once more.
Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.