Money Supply and EUR/USD: Levels, Ranges, Targets

From July 2014 to September 2014 began the ECB’s successive interest rate drops from positive to negative territory.
Eurozone M3 in 2014 was 10,108 billion. March 2017, M3 was 11,581 billion. In 3 years, M3 increased by 1,473 billion. The current Velocity of Euros equates to a paltry 0.000084 and this is obvious from slow M 3 growth. A higher GDP would see Velocity move faster. For now, Velocity, GDP and the overall Money Supply is dead and lacks movements.
Currency in Circulation in 2014 was 948 billion while March 2017 was 7390 billion. M1 matches money in Circulation at 7390 billion. Money in circulation difference equals 6442 billion which means 6 billion was added to Money in Circulation in 3 years at 2 billion per year.
Draghi’s QE program envisions bond purchases at 80 billion Euros per month or 86 billion USD. This means purchases at 7 to 8 times M3 at 11 billion. This is called economic stimulation.
The side issue to the intended article purpose is EUR/USD Correlates far better at upper 90% to its interest rates than M1 Money supply. If Draghi raises the money supply, laws of money and supply means EUR/USD and Interest rates will drop, particularly when the Correlation is strong.
In May 2014, EUR/USD began its descent from 1.3900 while the money supply was 10 billion. By September 2014, EUR/USD traded 1,.27000’s. EUR/USD trades today at 1.1200’s Vs 11 billion money supply. EUR/USD at 1.3900’s was already overbought from its multi year ascent which means it was dropping anyway, interest rate cut or not. How important is this data and what does it mean.
200,000 EUR/USD Futures contracts X $5,000 per contract = 1,000,000,000 billion or 1 billion.
200,000 EUR/USD contracts X 100,000 Euros per contract = 20,000,000,000 or 20 billion.
Traders pay 1 billion to trade 20 billion or 9 billion above M3. For M2 at 10,876 billion means trading 2x the overall Money Supply at 20 billion. M1 at 7390 means trading almost 3 times to 20 billion.
Overall 200,000 + Contract Volume was quantified as far to high and what reinforces this concept is 20 billion is to high. Futures contracts should trade directly around current money supplies.
Years ago, Soc Gen once performed terrific work on money supply issues but left in favor of mediocrity. A number of avenues exists to trade money supplies and quite successfully. The M2 and M3 relationship is the most favored trade as M2 is the long or short signal. Overall transmission must begin at Money supplies rather than interest rates first and this means yields become almost the 3rd cousin to the currency price as it applies to EUR.
EUR/USD. The ranges in EUR/USD opened extraordinarily wide in the last 2 days. The higher or lower break points are located at 1.1147 and 1.1313. I’m looking for this gap to close further over the next day. to see a better break point level. Ranges this wide in EUR is rarely seen.
In the way of 1.1147 is the 5 day average at today’s 1.1163. This area at 1.1160’s is vital because it represents a huge support level and must break for EUR to head lower. The 1.1160’s decides for EUR to reload longs or shorts will be the way forward. Below the 5 day to understand 1.1160’s is the 10 day at 1.1080. and a far distance. Short or long term from the averages, EUR remains and travels higher while overbought.
The bottom side breaks are located at 1.1201, 1.1187 and 1.1173. The point at 1.1173 reinforces 1.1160 won’t break today.
Above break points are located at 1.1259, 1.1284 and highly doubtful to see 1.1295 as EUR hits its high peak at 95.


Brian Twomey