M3, Eonia and EUR/USD: Levels, Ranges, Targets

 

EURO introduction in November and December 1998 began with an M3 Money Supply at 4286 billion for November and 4368 billion in December. In December and November 1999, M3 grew to 4688 billion in December and 4636 for November. By August 2008 crisis time, M3 was 9091 billion and doubled 10 years later from 1998. From 9091 lows, current M3 grew much slower, 2517 billion, to present 11608 billion. Overall, from 1998 at 4286 to current day, the ECB grew M3 by 7322 billion.

By ECB osmosis, consequence or design to grow the money supply, M3 from the 4 year average to its 1998 start is in upper stratospheric overbought territory. M3 grew far faster than the averages allowed the growth to occur by at least 3 Standard Deviations in the short term. M3 growth embarked on a straight path upwards in most months since 1998, since 2008 and since 2016. Hardly was a down month seen. A down month or temporary halt was transitory. No wonder the Germans and Wiedmann in particular want an end to the ECB’s 60 billion per month in bond purchases.

M3 11608 at its current 5% growth rate  places M3 at 12188 highs and 11027.60 lows. How the ECB finances its bond purchases is questioned as current credit to European residents amounts to 17,458. From 11608, the next month’s bond purchases places M3 at 11668 then second month at 11728 and 3rd month at 11788. In 6 months, M3 grows to 11908 and 1 year to 12208.

Bond purchases at 60 billion viewed from assets, liabilities, currency in circulation, loans and overall deposits is an absolute sledge hammer and far above the question to economic stimulation. If stimulation was the actual reason for bond purchases, the ECB could perform the task far cheaper than 60 billion. Is the cost 1% and 2% for Inflation and GDP 60 billion and per month. Over 12 months, 60 billion leads to 720 billion.

Eonia Vs M3 shares not only a high negative 90% correlation but the first trend line resistance to a higher M3 is located at 12996.33 and 11328.93. Not only is 12996 a solid line but any number at 13 billion will meet further resistance from averages 1 year to 10 years and beyond. In June to September 2014, the ECB dilemma at M3 10824.83 and 0 Eonia was allow Eonia to go negative to enable M3 its further rise. In 3 years, Eonia dropped 36 basis points in negative territory while M3 gained roughly 7 billion.

If bond purchases raises the money supply further and if raising M3 is the overall ECB goal, Eonia will see a further drop. An Eonia drop means EUR/USD travels far lower. Alternatively, a drop in M3 permits Eonia and EUR to rise and an unwanted situation for the ECB. Eonia at minus 0.360 translates to positive 0.64. Eonia doesn’t contain a far distance to 0. At minus 0.460, Eonia translates to 0.54 and 0.44 at minus 560.

Consider the SNB’s current 3 month Libor at minus 0.73 or 0.27. Denmark, Swiss and Sweden all contain current interest rates below Eonia purposefully. Lower Eonia then Denmark, Sweden and Switzerland interest rates go to 0. The ECB is in a crucial situation.

M3 at the 1 year average is located at 11364 and 2 year at 11101.33 then comes the drop to the 3 year average at 10824.83 and 4 year at 10587.66. The 6 and 7 year averages are located at 10324.62 and 10207.71.Targets on the 6 and 7 year averages to offer what overbought means is 10935.67 and 10842.64.

Eonia’s first resistance line is located at the 1 year average at minus 0.3469 or positive 0.65. Resistance lines then travel to minus 0.1886 or 0.81, then minus 0.1049 or 0.89 and minus 0.0618 or 0.93. Eonia will remain negative and low far into the future.

The volatility component and directional dictator in the Eonia / M3 relationship is M3 while Eonia is stable. The 1 year range in Eonia for example is 0.03 while M3 ranged 494 from 11114 to 11608. Further, the average deviation for M3 over 7 year averages is 209.53 and 0.09 for Eonia.

Draghi and M3 hold the keys to EUR/USD. The 5 year EUR/USD average is located at 1.2093 and must breaks below at 1.1174 and 1.1050. Draghi’s further complication and reported by Peter at Thomson Reuters is the June 2016 EZ Surplus at 105.95 billion dropped to current 22.2 billion June 2017.

 

Brian Twomey

 

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