
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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