Lightning has struck twice in the euro

Would you believe it? Mario Draghi has done it again – and lightning has indeed struck twice. Recall in December, the European Central Bank (ECB) “surprised” the markets by announcing a brave new world of massive bond-buying (money printing) qualitative easing (QE) operations and a historic negative interest rate regime. The purported idea was that by stimulating consumer demand (by encouraging more consumer debt), it could run their inflation measure up to the target of 2% – and get the eurozone economy off the floor where it is languishing.

And by lowering the value of the euro, it would raise exports and hence stimulate employment and the general economy. That is classic Keynesian ideology gone mad in a world of flat demand.

That little exercise three months ago prompted not a collapse in the euro, but a huge rally of several cents within hours (we took full advantage of that one). Would history repeat?

And yesterday, following the news that the ECB are ramping up bond buying from €60bn to €80bn a month, as well as lowering the policy rate from negative 0.3% to negative 0.4%, the euro initially fell and then rocketed up by over four cents in a classic carbon copy of December’s action.

That wasn’t in their script. I guess central bankers have a problem learning from history – even very recent history. They also have a problem with their grasp on reality. Wasn’t it Einstein who defined insanity as doing the same thing over and over and expecting a different result? Maybe they should have eased the euro lower by raising policy rates and ending QE altogether.

As happens with all overweening bureaucracies, they eventually get divorced from reality and from the real needs of the public they are meant to serve. How can the ECB (if it’s in its right mind) continue to believe that the world needs more debt and more inflation? By any measure, we have been at peak debt for some time.

Global debt has increased by a factor of four times GDP growth. And this debt has been fuelled largely by the central banks QE/Zirp/Nirp (zero/negative interest rate policy) schemes.

And here is a chart of eurozone private sector debt:

EU loans to private sector chart

That debt has hit the ceiling. Can the public take on any more debt at any price? Now if the ECB would mandate a negative interest rate for consumer loans, that would surely be a different story. But of course, that would never happen as it would send inflation rates well past their 2% target rate.

With eurozone populations ageing fast, perhaps the ECB has a cunning plan and is pinning its hopes on the millions of new migrants taking out “Ninja loans” (remember those?). They certainly qualify – no income, no job, no assets. Is this what European banks are being forced to offer when the ECB doesn’t want their deposits?

And how can a 0.1% drop in policy rates conceivably impact this chart? With personal loan rates and credit card rates over 20%, it is difficult to see what this will do – other than goose equity prices even further.

But my beat is the markets (and how to make money from them) – and this is what I wrote on Monday: “Draghi is fully expected to crank up the ‘stimulus’ machine of more QE money printing and even lower the policy interest rate further into negative territory. That was the overwhelming consensus view – and one I was likely to challenge.”

So how has my challenge worked out so far? Not bad.

Here is the four-hourly chart as I write:

EUR/USD spread betting chart

In anticipation of yesterday’s spike rally, my long trade is working but was not without the scare of the initial dip to the 1.0820 level. But then the market caught one almighty bid and ran the shorts for cover. Remember, most traders expected the euro to weaken and were heavily short.

My best guess at present is that the spike rally is wave C of an A-B-C counter-trend rally that made a typical overshoot of the Fibonacci 62% resistance level, which is where I took profits of over 300 pips on my long trade.

Now I am content to stand aside while the other participants slug it out in the aftermath of Draghi Day.