Friday, June 6, 2014

Euro Daily Chart

Draghi's mini-bazooka has not succeeded in driving the euro lower. Granted the euro pulled back from 1.40 down to 1.36 in anticipation of the easing announcement over the last month. The euro collapsed on the news to 1.3503 unable to break under the psychological 1.35 level, and bounced. Traders shorting the euro frantically ran to cover creating the launch higher to the same level as before the announcement. The euro is actually now higher than before the announcement. 

The idea behind the ECB lowering rates, creating a negative deposit rate and implementing other stimulus measures is to weaken the euro so the European manufacturers and exporters can gain an advantage and start to jump-start the sick economy. Perhaps Draghi needs a bigger bazooka like the full-blown QE money bazooka. The ECB's action yesterday is like the famous, and hilarious, clip from a Crocodile Dundee movie. The ECB pulled out a knife to weaken the euro. The euro pulls out a knife a lot larger and comments, "that's not a knife, this is a knife."

The deflationary scenario remains on the table for Europe moving forward. Once a country or region falls into a deflationary spiral, a la the two-decade Japan deflationary funk ongoing and the Great Depression deflationary funk that extended the pain back then, it is very hard to recover. Consumers cut back on spending (which is occurring globally currently) and see no reason to buy since in deflation things will be cheaper next week. This causes businesses to close and lay off workers which creates the downward spiral. The central bankers fear deflation the most since they are likely powerless against it if it appears in force and begins accelerating. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.