“How dare China devalue its currency!” the ECB and BOJ cried…as they prepared to do more of the same. Yesterday’s intraday crush were hardly enough to prompt the BOJ — the world’s foremost currency debaser — to expand QQE. But, the PBOC’s actions sure have them warming up the old printing press, and with a nifty excuse to boot. We’ve been expecting it.
The ECB, on the other hand? Well it’s pathetic, really. First, they threatened QE for years before actually doing it — giving everybody and their mother an opportunity to front-run it. When they finally announced PSPP on March 9, the EURUSD had been plunging nonstop for a full 10 months.
Left alone, the euro would have reached parity with the USD within 60 days, tops. After PSPP, it fell for exactly 4 sessions before the ECB pushed the panic button — bailing on the whole exercise. The reason, of course, was the impact it was having on stocks (the thin purple line below.)
Unfortunately for the ECB, it seems there are still a few investors out there who insist on viewing the markets as rational and fundamentally driven. They haven’t (yet) been trained in Pavlovian knee-jerk currency debasement buying panics. They view a weaker euro as tantamount to a weaker European economy that argues for lower stock prices. Fools.
This is no doubt a severe disappointment to TPTB, who rather hoped that the EURUSD would pick up where the USDJPY left off: the driver of the carry trade that has kept stocks on the rise for the past 4 years.
Instead, the EURUSD has evolved into a third-string bench warmer by which to lever stocks higher when the CL and USDJPY can’t be bothered. EURUSD is so whipped that it can’t even complete a simple Gartley Pattern; every time it dips below the .618 Fib (1.0845,) stocks go apeshit.
So, the next time Draghi threatens to devalue the euro in response to China’s massive 4% currency move, remind him that he slashed the euro’s buying power by 25% between May 2014 and Mar 2015. It drove interest rates below zero and inflated PE’s to historic highs, but did nothing to revitalize a failing economy.
With multiple downside targets to choose from, SPX nailed the deepest natural Fib target (the .886) yesterday, then spent an hour flirting with another leg down to actually complete the H&S Pattern before the algos took over and sent it spiking higher.
The main drivers were the EURUSD and CL, which constructed another flag pattern just like the one on Aug 3-5, the last time it was called upon to prop up stocks.
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