TRD: Faster and deeper QE will sap the euro's strength
Looking across the Eurozone bond market in the main, liquid markets, one can see that the yield on 10-year sovereign debt from Austria, Belgium, Finland, France, Germany and the Netherlands is below 1.00%.
Is this a sign of complacency? On the one hand some analysts announce there is no need to be concerned about the yield structure in bond markets. This is because the European Central Bank will be forced to expand its quantitative easing programme and thus by association, all asset prices will rise.
Critics of QE will argue that this will simply lead to the storing up of even more lurking unintended consequences that are spawned by QE. It will lead to unjustifiable financial asset price inflation, and future asset price bubbles that will burst with a deafening BANG! As against a mere pop.
The more extreme opponents of QE are continuing to complain about the spectre of releasing inflation and that when oil prices stabilise then the next step in the price process will be a rampage of rising CPI that will drag up wage demands in tandem.
As the ECB meets in Malta later this week I am looking at the dismal deflation numbers. Consumer prices in the Eurozone fell for the first time in six months by an annual 0.1% in September, pushed down by energy prices and matching preliminary estimates.
This is a pressing reason for ECB president Mario Draghi to increase the size and scope of its QE programme to drive inflation higher and the euro lower.
If he fails to act now, the euro could well rally further which will be of no assistance in addressing Europe’s ongoing dismal economic performance.
However, as always, the decision making process inside the ECB is handcuffed by the bank's own hawks who believe enough ground has already been conceded. I fully agree that more structural reform needs to be undertaken but hiding behind a “wait and see and hope for the best” approach is pathetic and will not help.
I know what needs to be done…the ECB needs to start acting decisively and stop dithering, but as with all things Eurozone I expect we will be disappointed.
The short-time technicals are mixed, but I am taking a medium-term view and there the technical aspect is “sell”. Of course I would take quick profits if available, although I am minded to be a little more strategic with this trade. I will sell the euro at 1.1374 as of 12:00 GMT.
