Thursday, November 21, 2013

ECB plays games | Gold and the Aussie do the trick

The most telling event yesterday was expected to be the release of the minutes of the last Federal Open Market Committee (FOMC) meeting in the US. This release takes place late in the day in GMT terms, where we live. While waiting, we marveled that of the three instruments we had in play, Gold (XAU/USD), the Aussie dollar (AUD/USD) and the Euro (EUR/USD), two, gold and the Aussie, were performing well as shorts, while the Euro was also performing well, but as a long. All of them had the US unit as the quote currency, so this situation was worthy of note. Our signals for an uptrend continued to indicate that the Euro was still rising so there was no motivation to change direction, although we did signal earlier that the current rise was a retracement and was expected to reverse.

In the middle of our afternoon yesterday the rise of the Single Currency was brought to an abrupt stop and the pair went into rapid decline. The proximate cause was an article on Bloomberg, quoting an unnamed source “with knowledge of the matter” who said that the ECB was considering going negative on the interest it pays for overnight deposits that are made by banks. If true, this would be perceived as a version of Euro Zone Quantitative Easing (QE).

Gold and the Aussie headed even further south in sympathy with the Euro move, and this was further reinforced with the release of the FOMC minutes, which confirmed that tapering is on its way.

There is nothing new about the ECB manipulating the interest rate. At the height of the Euro crisis it bought the sovereign bonds of the peripheral states in order to control the spiraling yields, and then encouraged the sellers, mostly banks, to deposit the cash received with them by raising the interest rate. The end result of all this was that the Central Bank could claim that no new money came into circulation, and nothing approaching QE had taken place. This was in Jean Claude Trichet’s time, when QE was an unacceptable concept in Europe.

They are also past masters at the science of jawboning, or getting market reaction by just talking. When the Euro was falling precipitately during the crisis it was enough, apparently, for the ECB to call the Foreign Exchange desks of the major dealers and ask for a quote on the Euro, for it to respond. The word would go out that the ECB was about to intervene in the market.

Regular readers will remember that we called for this retrace in the Euro to end at a Fibonacci level. The chart at the top shows that the close the day before yesterday, and consequently yesterday’s open before the fall, occurred at the precise 50% Fib retracement level.

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