Our call on the EURGBP worked out
well yesterday. The pair got through the support provided by the 200 period EMA
on the four-hour chart without too much difficulty, as can be seen above (blue
line). However, while our focus was on the pound Sterling, the main engine for
the drop turned out to be weakness in the Euro. No matter, we’ll take it. The
Mandelbrot routine knew the direction of the pair.
And the reason has to do with the
asset purchase activities and intentions of the ECB. It was known that the European
central bank was starting its asset purchase program yesterday, but this had
been well telegraphed so was expected to have been priced in. But in the
morning a report emerged to the effect that they were also contemplating adding
the purchase of corporate bonds to the mix, and this had the effect of
weakening the Single Currency. The amount of money put aside for this overall program,
in the trillions of Euro, is enormous.
Corporate
and covered bonds, and ABSs
You might be wondering about the difference
between a covered bond, issued by a bank, and a corporate bond. So was I, so on
your behalf I looked it up. While covered bonds are also corporate bonds, in
the sense that the issuing bank is a corporation, they are backed by cash flows
from mortgages and similar loans, which gives comfort to the purchaser. Plain vanilla
corporate bonds have nothing to back them other than the viability of the
issuing corporation (so it can be assumed that these will need to have a good
credit rating to satisfy the ECB). Asset Backed Securities (ABSs) are as it
says on the tin: securities that have assets, such as property, behind them.
When the story about corporate bonds
being added to the ECB asset purchasing program broke, a source “close to the central
bank” said that this had not been discussed by the Governing Council. Our EU
correspondent tells us that this is not a very meaningful formula as the matter
will certainly have been considered at many meetings between the Chefs de
Cabinet and their staffs (the people who do all the meaningful work) of the
various interested parties.
All in all, it adds further to the
impression that the bias attached to the Euro at present is to the downside. The
whole asset purchasing activity is as close to Quantitative Easing (QE) as the
ECB can get, and QE in the US resulted in a weakening of the greenback, which
is only now being reversed with the termination of the program. It also worked
wonders for the equity markets, so can we now expect a surge in European
stocks?
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