Will Mario Draghi destroy the euro?

The assumption is that European Central Bank money printing will sink the euro, says John C Burford. Understandable - but probably wrong.

Today, the US markets are closed for Labor Day, so I will follow up on my coverage of the euro, because currency markets are very much open for business.

All eyes of currency traders will be on what Mario Draghi is expected to announce early this month. Because of persistently weak eurozone economies and now, even Germany appears to be struggling the consensus is that the European Central Bank (ECB) will soon engage in their own version of QE.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

This is a stimulus scheme that they have steadfastly resisted in the past, mainly on the back of the conservative Bundesbank's refusal to monetise sovereign debt.

The latest data shows the inflation rate is falling and is approaching the dreaded deflation rate at zero (it's currently at 0.4%). The ECB is under huge pressure to do something and do it pronto.

Advertisement
Advertisement - Article continues below

Because the ECB is expected to follow in the footsteps of the US Fed and hoover up sovereign debt, bond yields of Portugal, Greece, Spain and Italy have been pushed down to ultra-low levels by traders who anticipate cashing out massive profits to the ECB. We shall see if the ECB will be so obliging.

This has been the thinking behind the heavy selling pressure on the euro in recent weeks and has become the mainstream belief. The assumption is that with money-printing comes a massive increase in euro supply and hence a decline in its exchange rate. This is all very understandable (but probably wrong!).

As Joe Granville a well-known trader of yesteryear maintained: "When everyone believes something is obvious, it is obviously wrong".

We are all familiar with seemingly perverse market moves in the face of an important development that should' have indicated the opposite move. This is often a case of a buying the rumour, selling the news' event, and I am wondering if such a thing could happen with the euro.

An opportunity or a trap?

my last post of 20 August

Short-term traders were thus presented with an opportunity to take good profits on their shorts.

Advertisement
Advertisement - Article continues below

But how does the hourly chart appear now?

14-9-1-MWT-1

These are my tramlines from before. They are not particularly impressive, with the lower tramline having few accurate touch points. The upper tramline is a little better, but with the market toying with the lower line, the upper one isn't in play at the moment.

Last week, the market moved lower and has been wobbling around the tramline as traders position themselves ahead of the expected ECB announcement.

And with this volatile action around my tramline, it is no longer acting as it should as a line of support, and I decide to abandon it.

This is the correct action to take. When your tramlines cease acting as solid lines of support or resistance, then you need to take a hard look whether you should continue to rely on them.

But with the positive-momentum divergence (red bars), is the market preparing for a bounce up? Selling pressure appears to be waning, and that would certainly surprise the large army of shorts, which had fresh reinforcements last week as shown by the latest commitments of traders (COT) data:

Advertisement
Advertisement - Article continues below

Non-commercialCommercialTotalNon-reportable positions
longshortspreadslongshortlongshortlongshort
(Contracts of EUR 125,000)Open interest: 402,709
Commitments
53,989204,6466,029306,0736109,975366,091320,65036,61882,059
Changes from 08/19/14 (Change in open interest: 6,249)
-2,7859,047-6687,0055533,5528,9322,697-2,683
Percent of open in terest for each category of traders
13.450.81.576.027.390.979.69.120.4
Number of traders in each category (Total traders: 208)
3985275359108155

The trend-following hedgies swung even more to the bearish side and are now holding a four-to-one ratio of short to long positions. These are the very conditions where a swift reversal can occur.

Not only that, but the latest DSI (Daily Sentiment Indicator) data shows that there are only around 13% bulls a multi-month record-low reading. The last time it was this low (in July 2012), the market a major low (check your charts!).

The question I have is this: what if Draghi does announce a quantitative easing scheme, but does not involve massive sovereign bond-buying in the same way as the Fed did? We may yet see fireworks in the euro.

Advertisement

Recommended

Visit/trading/spread-betting/600782/boeings-share-price-plummets-heres-how-to-play-it
Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
Visit/519524/how-my-2019-spreadbetting-tips-fared
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Visit/519285/bettingon-politics-some-safe-labour-bets
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Visit/518916/ds-smith-will-deliver
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019

Most Popular

Visit/economy/uk-economy/600837/rishi-sunak-new-chancellor-spending-splurge
UK Economy

Britain has a new chancellor – get ready for a major spending splurge

The departure of Sajid Javid as chancellor and the appointment of Rishi Sunak marks a change in the style of our politics. John Stepek explains what's…
14 Feb 2020
Visit/economy/600814/money-minute-friday-14-february-the-latest-from-rbs-britains-state-owned-bank
Economy

Money Minute Friday 14 February: The latest from RBS, Britain's state-owned bank

Today's Money Minute previews results from RBS – Britain’s state-owned bank – and from pharma giant AstraZeneca.
14 Feb 2020
Visit/economy/600813/money-minute-thursday-13-february-latest-numbers-from-barclays-and-centrica
Economy

Money Minute Thursday 13 February: latest numbers from Barclays and Centrica

Today's Money Minute previews earnings reports from Barclays Bank and Centrica, plus the latest US employment picture
13 Feb 2020
Visit/517625/tr-european-growth-trust-why-investors-shouldnt-overlook-europe
Sponsored

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019