G10 and Draghi: Levels, Ranges, Targets

 

EUR/USD traveled 969 pips since June from 1.1122 to 1.2091 and the explanation to EUR/USD’s rise is not found in Trump as any may believe but rather in the European Money Supply.

European M3 is growing from 4.5% to 5.0% and from July’s M3 at 11,654 billion that means roughly 571.046 million and a range from 11,082 to 12,225. Last time this issue was visited, M3 was severely overbought at 12,000’s and targeted 9,000 to 10,000 and lower 11,000’s.

June M3 was 11,650 and May was 11,608. The EUR/USD rise is most explained by M1 as Currency in Circulation and Deposits were off 9.1% in July, from minus 9.7% in June. May was unchanged at 9.3%. What was off was the rate of growth in M1 as May began at 7476 and rose to 7532 in June and 7554 in July. Why July is Money Supply figures are reported for the previous month as the release is to sensitive for real time releases.

Overall M3 from January at 11,436 to July at 11,654 is an addition of 218 million in 8 months or roughly 27 million per month.
The restriction of the money supply is a positive development to explain EUR/USD rise from June yet EUR/USD rose strictly by the excghange rate as interest rates faied to follow and support the rise. EUR/USD is now massively overbought and interest rates flat on the floor. Flat on the floor means interest rate curves lacks a signal and informs the interest rate is sloshing around and going nowhere. Inside the interest rate price is zero, nothing. The analogy of the lost ship is apt. Yet the Interest rate should be much higher than current 0.64.

If Draghi’s economy is as rosy as he states then price indicators in GDP and Inflation must rise. This means interest rates and the EUR/USD can travel much higher from current levels. Draghi won’t have a choice except to raise to support the recovery. The question is if as we;ve seen this story before over the failed 9 years of stimulus and economic dreams.

If Draghi restricts stimulus purchases from $60 to $40 then a further EUR rise is supported . The greatest risk for Draghi is the exchange rate to travel far hgher out of control before he sees GDP and Inflation higher. Furher, if the exchange rate travels higher without interest rate support then the economic reality will come to an end and the exchange rate wil drop like a rock. The exchange and interest rate together is currently far out of kilter. This must be aligned first beforte Draghi can think bullish economically.

From the USD side, if Trump passes the proposed tax cut then USD’s current position on the floor should see a recovery. The tax cut severely challenges Draghi as Europe and USD are designed as total competitive opposites. One side must win while the other side loses. One side’s GDP and exchange rate will rise while the other side falters. Further, both Draghi and Yellen propose restriction of stimulus and its bullish for both USD and EUR.

While Draghi is feeling as confident as a movie star after a 9 year hiatus, he like Yellen has challenges ahead and the road won’t be easy.

EUR/USD is approaching its 5 year average at 1.2075 yet EUR/USD is far overbought from the 50 and 253 day averages. As EUR/USD climbed since June, the rise dragged AUD and NZD prices higher. Draghi and Yellen;’s decisions contain implications out side Europe and the US. AUD/USD overbought is in the stratosphere and longs are not recommended.

The breaks for EUR/USD are located at 1.2101 above and 1.2027 below. Below 1.2027 then comes 1.2003 while above targets 1.2095 and 1.2128. What Draghi created in EUR/USD is larger ranges in which EUR may travel. If ranges in EUR expanded then its natural to see USD ranges restrict an this is the case.

USD/JPY must breaks are located today at 107.33 and 107.71.

USD?CAD breaks are located at 1.2038 and 1.2081 Vs 1.2103 and target to 1.2153 on breaks.

Brian Twomey

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