Thursday, January 9, 2014

More nails in the coffin of QE | Euro fails to stick to the script – why?

Both the minutes of the last FOMC meeting in December and the results of the ADP employment report, all released yesterday, point to the probability, rather than just the possibility, that Quantitative Easing (QE) in the USA will be a thing of the past later this year.

The FOMC minutes showed a rare consensus on the decision to begin tapering. The comments were to the effect that risks are becoming balanced as far as the economy is concerned and, although inflation is still well below the 2% target that the Fed would like, certain members are beginning to raise the question of excessive inflation in the future if QE is continued for too long.

The ADP employment report was another one that easily beat expectations. Although, as we have pointed out here, the ADP figures, produced by a private organisation, are normally but poorly correlated with those of the Bureau of Statistics, (the official figures that dictate policy) they have raised expectations for another rise when the Non-Farm Payroll results for December are announced tomorrow. Anything below 200,000 additional jobs in the NFP report will be greeted with disappointment.

Euro fails to stick to the script

All of the above, on top of an unscheduled reduction in Euro-zone interest rates late last year, should have resulted in a fall in the value of the Euro against the US dollar.

There are mutterings in the Forex industry about several big players getting badly burned because of this, and indeed we have had an element of cognitive dissonance in relation to it ourselves.

However, despite all traditional indications to the contrary, the medium term trend since mid 2013, as indicated on the EURUSD weekly chart (above) by higher highs and higher lows, and price comfortably above the 200 period SMA, is upward. Why is this?

A look at the illustration at the top of this commentary might supply a clue. This is the daily chart of the Euro against the Swiss franc. During the crisis in the Euro-zone the Swiss Central Bank intervened in the market place in order to pin its currency to the Euro, at a EURCHF rate of 1.20, due to the fact that it was gaining a strength that threatened Swiss exports. This was happening because the franc was seen as a safe haven in a time of crisis, given that the German Deutschmark had been subsumed into the Euro.

Could it now be, with the crisis in the Euro zone periphery at least giving the impression of being under control and with economic indicators in Germany, the locomotive and indeed the powerhouse of the Euro zone economy, on the rise, safe-haven status is being transferred, to a certain extent, to the Single Currency?

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