November 24

Was Easy Friday a Game Changer?

This past Friday was one of the busiest days of central bank news in a very long time. European Central Bank President Mario Draghi made a speech in which he left no doubt that action will be forthcoming to boost inflation if nothing changes in the near term. China cut it’s state mandated 1 year lending and deposit rates, with many analysts expecting more cuts next year. Taking these two moves in the context of the Bank of Japan’s surprise move to increase it’s asset purchase program, financial conditions are as easy as they have been since the Fed and BoJ both launched QE programs in the late 2012.

To a certain extent markets already expected Draghi to be easy, but his tone and sense of urgency are something we have not heard up until now. He stressed that inflation must be boosted “as soon as possible”, and that the ECB can “broaden the range of assets” it purchases. The EUR fell sharply after his comments as traders rushed to put on EUR funded carry trades which were coincidentally delivered a huge boost a couple of hours later as China cut rates for the first time in over two years.

Stocks and commodities took both developments positively as West Texas oil regained the $75 level, and Brent closed above $80 which gave the commodity bloc a much needed respite. EUR crosses against risky high yield currencies saw some of the biggest moves in while as EURAUD fell almost 2%. The news events are highlighted below on the EURAUD 5 minute chart from Friday.


Markets are in an interesting place at the moment. The Fed is moving towards tightening policy, while every other central bank is on hold or actively easing policy. These opposing forces seem to cancel out, so I do not expect any significant sell off in stocks or emerging market currencies any time soon. The wall of easy money has grown so much taller in just the last three weeks that it’s just becoming almost pointless to lean against it. I am throwing in the towel on near term downside for AUD, NZD, CAD and the EM currencies.

FX traders are in luck because easing of policy always seems to create the easiest trends to bet on. While I hate to chase ‘old’ trades, selling EURUSD and buying USDJPY are the most obvious trades from a fundamental stand point, and for all we know the moves have just gotten started. EUR bears also just picked up a friend in the Swiss National Bank as the ongoing intervention at the 1.2000 level will require diversification (selling) out of Euros into other currencies as seen last in 2012. Just watch out for any increase in the EURCHF peg, that would set off an massive but temporary EUR squeeze.

Admittedly current market conditions are somewhat frustrating because there are no new developments that challenge the current status quo. FX rates are moving (in comparison to the summertime) but the stories aren’t changing. There are no pull backs, just a slow grind in the same direction accentuated by spurts of action driven by even more aggressively dovish comments or policies. Those of us looking for a new trade, where we can jump into a trend that isn’t crowded may be waiting for some time.