Mario Draghi finally admitted he is trapped. There is no exit from his negative interest rate policy that doesn’t end in tears. Now that he has a political reason to be dovish, Trump’s aggressive trade and tariff policy towards the EU, he did so this morning.
The latest policy statement from the ECB is a typical bit of central bank double-speak. But, this time it is a little different. Because normally Draghi does whatever he can to talk up the euro, to support continued front-running of his QE program to subsidize European bond prices.
But this morning Draghi set a dovish tone which sent the euro crashing down. This means he’s beginning to invite higher rates thanks to the Fed’s raising rates yesterday.
The disparity between the central banks’ policy direction has to end or there will be massive capital flight out of Europe to the U.S. where yields are higher. Pension funds on both sides of the Atlantic are suffering.
My latest article at Seeking Alpha told people to fade the euro rally because it was unsustainable.
Moreover, as we move deeper into this unfolding political and debt crisis, there will be a shift into tangible assets. This is what has been buoying stock prices here and in Europe. And I would look at the current strength in the euro as unsustainable, making any move towards $1.20 optimal shorting territory.
Putting a short against the euro on via the ProShares Ultra Short Euro ETF (EUO) either directly or via an options straddle would be a good hedge against your equity exposure. The next six months will be pivotal so taking out an EUO straddle with a November expiration makes sense here.
Any move below $1.155 on a monthly closing basis would indicate a bigger move down is coming to re-test the 2017 low near $1.03.
While he signaled the end of his QE program, Draghi also talked down the euro-zone’s growth prospects, a clear message to the market that the euro is way to high and needs to come down.
This is why the euro was pushed back towards support at $1.155.
Moreover, a close this week below $1.1653 would negate last week’s reversal signal, confirming that this is a very weak bounce off of support. There is now significant short-term resistance at $1.18.
A weekly close below $1.155 would be devastating for the euro. And will invite liquidation of vulnerable European sovereign debt, i.e. Italian, Spanish, Portuguese.
Yesterday Italian 5-year CDS spreads closed at 148 bps. This morning they’ve spiked again back to around 219 bps.
But the most interesting development is occurring in the precious metals markets.
Got Gold?
Gold broke back through $1300 convincingly as the weak dollar/strong gold pair trade broke down significantly. And to that point I want to highlight that today’s action tells us quite clearly that safe-haven trades are on and traditional, calm-market relationships are breaking.
The strong dollar/weak gold trade is beginning to break down. Below is the weekly chart of the ratio of Gold to the USDX which supports what I’ve talking about.
Note how Gold is no longer falling versus a rising dollar over the past few weeks. Gold is beginning to move in-sync with the dollar, indicating more safe-haven buying and the move into tangible assets.
A look at gold stocks, as represented by the XAU Index, and we see an even clearer picture of the sentiment change occurring.
We have a coiling pattern in 2018 of lower highs and higher lows of this ratio, indicating that the market has reached a near equilibrium. When that occurs the odds of a small move indicating a trend change rises because a small move creates new price boundaries to explore.
In the case of Gold stocks, investors are beginning to handicap higher prices coming in spite of a rising dollar. This indicates a shift in sentiment away from faith in government. The dollar, in this first wave of the unfolding shift, will trade as alongside safe-haven assets because of the massive synthetic short position against it in the form of dollar-denominated debt.
If you think this is a little early to be making this call I give you silver as the confirmation of something new. Gold may be a little expensive given the current environment of dollar tightness, but silver is downright dirt cheap.
Any new bull market in the precious metals will always be led by silver, because of its industrial character. Moreover, the current market is in supply overhang, so until there is a need for it from a monetary perspective, there is little to push the price up. Unless the market is primed for a change.
Volatility in silver has been non-existent for months. We have had false breakout after false breakout which every time is met with buying at a higher price and sharp price collapses any time the market attempts to move higher. Today’s price action broke through, albeit briefly, the previous high from late April. A close this week above $17.25 would be very bullish and indicative that the bulls have returned to the silver market to lead things higher.
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We’ve had quite a roller coaster in precious metals last 48 hours. Do you still see gold heading towards 11200..is this what’s happening now? Where is silver support?
Dmitri, with this shellacking, Gold now closed below support and the next level down is $1236 and then $1208 and then $1123.
For silver, it’s simply been stuffed right back into the box… the coiling pattern continues as the banks still control the PM markets to ensure panic is kept to a minimum.
Yes, it is still possible for a move back into the low $1100’s on gold. Silver could break down in that event.