Euro Crash Snapshot

Mario Draghi, the ECB President failed to give satisfactory indications on:

1.Whether or not there will be an extension to the bond buying, money printing QE beyond March next year.

2.How the taper down process of QE will occur , although he did probably save the Euro by stating that it would certainly not be abrupt.

For me this is a canary in the coal mine with regard to how sensitive the markets really are to any changes in quantitative easing. Remember, quantitative easing is the term used to describe the injection of funds into the economy through bond purchasing programs by the central banks. Currently, the European Central Bank is buying 80 billion Euros worth of bonds per month.

The economics behind it is quite concerning. The idea was that as the central banks of the USA, Europe and Japan buy these bonds, the money that gets injected into the system will trickle down to little old you and me.

Unfortunately, we saw the effect on the Euro currency as the market loses certainty about the bond buying program. Does that sound healthy to you? A currency, an economy completely addicted to money printing and the moment there’s hint of uncertainty it all wants to come crashing down. The Central Banks started a program that appears to have done very little for economic growth and has inflated the stock market, bond market and currencies beyond what is sustainable.

But, then again, the Euro has been trying to stay low for a while. They’ve cut interest rate into the negative to ensure that the Euro stays low and it appears that Draghi’s comments have been more effective than direct monetary policy.

The same occurred for Japan a few weeks ago. As the JPY/USD was on the cusp of getting too strong, there was conveniently an earthquake reportedly caused by North Korea’s nuclear testing and the the Yen was turned away from getting any stronger.

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Yes, this does sound a little crazy, but, google it. Those were the events right at the moment when the Yen was getting too strong and the U.S Dollar strength was being threatened.

We’ll have to see how this all unfolds in the short term. Any weakness in Gold from here on would be a direct result of U.S Dollar strength which is temporary in my humble opinion. Any Dollar strength from here on is a direct result of Euro and British pound weakness which is also temporary in my opinion.

As I said in yesterday evening’s post, there is intense volatility with regard to currencies and as a holder in Gold miners, I’ll need to wade through the short term noise.

I mentioned on twitter yesterday that I did expect pull backs along the upward way of Gold. Many traders will get knocked out along the way, setting stops too close or getting emotional or nervous and pull the trigger at the wrong time.

Any move up in gold will also be aggressive, so trying to enter and exit trades to try save small profits may result in missing larger moves.

A Merchant focuses on the big picture. The market will digest this minor ECB shock fairly quickly, like a child bumping her their head, they’ll cry about it, but distract them with funny faces and moments later they’re all smiles.

As we head into the U.S elections, expect the unexpected: drama, volatility and market madness.

See you around the ASX.

Written By: Jack Davis