QE3 and OMT Equal a Strong EUR

There are two things to note. First, markets are in expensive territory and second, don’t mess with CBanks. The “big dollar” has weakened materially across-the-board after the Fed’s announcement yesterday that it will undertake more monetary stimulus measures. A result of policy’s makers convictions has cleared the way for the EUR to push through the 1.30 level for the first time since May. The Fed’s commitment to low interest rates until the mid-2015 and Ben’s readiness to undertake additional AP’s if the US economy does not find stronger traction should keep the “greenback” under pressure in the coming year. Both pre-and-post FOMC price action has been constructive as the EUR pulls further away from 200DMA at 1.2880.

There is no denying it, this market move is “rich.” Despite the bigger than expected Fed stimulus, one hears the rumblings of “diminishing returns of QE.” For many institutional dealers, the move we have experienced since the ECB announcement has many itching to start a countertrend and get investors to buy into it. In trading, and specifically for price makers, it’s about controlling your own domain. Do not be surprised to see speculators considering fading this knee jerk reaction. Many are looking to fade the EUR gains, although so far the only fading would be hard end profits. Counter trading the CBanks, the ECB, Fed and PBoC stimulus can get very costly. Now that the market has broken the previous yearly highs, the prudent approach would be to buy on dips and not short. Speculating against the unlimited firepower of a CBank is not smart!

Germany’s Finance Minister Schaeuble seems to have discouraged Spain, for now, from seeking a full international bailout. He believes that another request for outside aid “currently risks a new round of financial-market turmoil.” Mind you, OMT has helped Spanish funding costs to fall aggressively, but for how long? There is Grexit talks on the horizon, it never goes away. An IMF alternate executive director, said that Greece will require additional financing, which may take the form either of Official Sector Involvement (OSI) or of additional loans (the market is losing count).

BoS data this morning reveals that the Spanish government debt has rallied to +75.9% of GDP in Q2, a new record as the Government seeks to finance a massive budget deficit. The increase comes as the government grabbles with a towering deficit that stood at +9% of GDP last year and needs to be brought down to a manageable target of +6.3%. this is a difficult task given the usual and typical scenario of the peripheral Euro members of dwindling tax revenues and rising unemployment. Spain also has regional governments on a cliffs edge. The +EUR100b pledged to prop up their financial industry is not enough. Germany, the reality is that Spain requires further financial help!

For now, expect the Pre-German court decision lows at 1.2815 as being key support for a technical uptrend that could have a 1.33-1.35 handle. The Post Fed lows are around 1.2880. However, the initial Fed reaction move, 1.2960 or the strong psychological 1.30 barrier should produce strong demand. In truth, speculators are far from being short dollars. Despite QE2 supporting a +$30b short, the last CFTC reports shows the spec’s are long the “Big” dollar.

Market momentum will have us trading higher, first focus is 1.3075 EUR’s, above this and price action will accelerate further higher. The 10 and 30-day moving averages are positively aligned, further proof for an upside potential. The real play in all of this was Gold. The specs had it correct. Profit taking as “buy the rumor sell the fact” has been under way for most of the O/N session. The yellow metal has rallied more on poor employment data rather than Fed stimulus. The market should have been trading at +$1,800 post announcement. Don’t worry, the commodity will be the net winning beneficiary of QE. Expect strong support ahead of +$1,700 and key resistance at +$1,802 (Nov 8, 2011 peak).

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