EUR/USD Dead Cat Bounce As ECB Starts QE Program March 10, 2015
ECB Starts DOMO (Draghi Open Market Operations) Going Full Japatard
I have to admit that the DOMO acronym is not my invention but this is likely the first time you have seen Japatard. As I was looking through article saying just what bonds the ECB has started to buy yesterday, the only ones listed were German and Italian. It is only the beginning so I do expect the list to expand providing the ECB can find willing sellers of other peripheral bonds. Of which don’t look good so far. However when doing the math on the amount of money to be spent (60 bil Euros per month) providing not much changes the ECB will be monetizing around 140% of German bond issuance this year.
As for Germany, on a run-rate basis, and assuming allocation based on the above mentioned capital key, it means that for the next 12 month period, assuming no major funding changes in Germany, the ECB will swallow more than a whopping 140% of gross German issuance!
Or, said otherwise, the entities who will buy more than all gross German and Japanese issuance for the next 12 months, are the ECB and the Bank of Japan, respectively.
This also means that to fulfill its monthly purchase mandate, the ECB will have to push the price to truly unprecedented levels (such as the -0.20% yield across the curve discussed previously, or even lower) to find willing sellers.
That said, please don’t tell your average Hinz and Kunz that more than all German bond issuance in 2015 will be monetized. It will bring back some very unpleasant memories.
Now for the problem of losses that will occur at the ECB when they buy “safer” bonds that carry a negative yield. How is that for a oxymoron? Buy the safe bonds and guarantee yourself a loss? This has to be the closest we have come to Bizarro World yet. And the answer was.
Mario Draghi’s PSPP is just barely off the ground and we’re already beginning to get answers to some of the tough questions the ECB faced regarding the program’s implementation. For instance, we wondered how the central bank intended to treat the losses it was bound to incur as a result of purchasing billions in EMU debt carrying a negative yield. The answer: try to avoid that paper for the time being.
EUR/USD Dead Cat Bounce
In typical fashion the EUR/USD did have a pullback before closing just a few pips above last weeks close yesterday. I did catch the short from 1.0896 and still holding for a larger drop as the QE program kicks in to weaken the Euro. If there is still any thoughts of the US raising rates this pair has good potential for a severe drop over the weeks to come.
This morning price is fighting the gap open level from yesterday and I do expect that to hold during the Asian session in order for them to make the pullback and run the breakout traders to the Asian highs before the next push down. Having said that, if they cant find buyers then it wont happen and we will get the run south with no test upward. My bias for the push down is more fundamental based but considering we do have the typical third push head and shoulder reversal pattern showing the lack of buying at yesterdays highs, price action does back it even if we haven’t seen a three push move. The best level to short from is up at 1.0863 but if they hold price to the lows of the Asian box then they may only run stops to the Asian highs during London today, hitting breakout traders in the process. There is a small chance they hold this range today but the probability is low and will depend on the ECB having more trouble finding sellers than expected.
GBP/USD Runs Reversal Push
The GBP/USD has a better chance of seeing a second intraday push to the upside today but I will be a bit more open for the short from yesterdays highs as well. In order for it to make the next push up it will need help from the EUR/GBP dropping if they do push the EUR/USD down. To some degree I expect this pair to either hold this range until more data comes out either backing a US or UK rate rise, of which is better for the US at this point even though that could change in a heart beat. If we see conviction below 1.5092 during London then a test of the lows should be in order although I would prefer any short from yesterdays highs. Otherwise I will be looking for the Asian lows to hold and see they wont let it drop during London in order to take a long from there.
EUR/JPY Runs Push Up With UJ
With the EUR/JPY running more with the USD/JPY there is a decent chance this could make the next push. However I should also point out that the UJ is hitting a multi year high that we have to go all the way back to 2007 to see where it went higher. The 121.80 level does have potential to hold it back for now but a daily close above will signal the next test up into the 124.00 level and if they dont have the conviction to push the EU down will drag the EJ with. My bias will be for the next push up here but I want to see some hourly conviction on the UJ above the 121.80 while they hold the lows on the Euro in order to have confidence in a decent move. Otherwise this pair has more potential to hold this range.
Forex News Today
The calendar is quiet on significant releases today but we do have good potential for some good movement on GBP pairs when Carney speaks mid US session. Of course it will all depend on if he says anything about interest rate increases and as of late he has been rather quiet, leaving his lackeys to do that for him even though their rhetoric has slowed as well. Watch out for one of those a few hours later.
Otherwise the Asian session tomorrow could be interesting having the RBA Assistant Gov speak along with Aussie Home Loans and Chinese Industrial Production expected to slightly drop. A big disappointment will be bad for the AUD while a significant surprise upward should be positive.
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