ECB Ups Its Game
March 14, 2016
Dennis Gartman is editor and publisher of The Gartman Letter, and strategic advisor of the AdvisorShares Gartman Currency Hedged Gold ETFs (GEUR & GYEN). He regularly contributes to AlphaBaskets and lends his institutional insight to educate advisors and investors about commodities and the forex markets, including about trading gold in different currency terms.
We continue to be bemused and actually quite amazed at the EUR’s strength since Thursday for we continue to believe that what the ECB had done in announcing a €20 billion/month increase in the purchase of debt securities along with cuts in all three of its interest rates and along with the announcement that it shall buy corporate as well as sovereign debt securities to effect the monetization program far, far out-trump the single sentence that Dr. Draghi made regarding the unlikely nature of still lower rates to be the important concepts from the ECB’s monetary policy committee meeting last week. We continue to “see” Dr. Draghi’s comments on the lesser likelihood of lower rates as a mere “toss-off” to the Germans on the monetary policy committee rather than as a true policy statement. But clearly, for now, we are wrong given that the EUR has traded to 1.1200 from 1.0850 in the moments after the Bank’s announcements last Thursday.
We continue to see this as the “Cool Hand Luke” effect: a “Failure to communicate,” but we may well be wrong there too for we had expected Draghi and others to move to clarify the situation as early as Friday and neither he nor they have done so.
All of that said the focus in the markets this week shall be upon the Bank of Japan and upon the Fed, with the former already having met earlier today and ending its two-day meeting “this evening” when Tokyo reopens, while the Fed’s two day meeting begins tomorrow and ends Wednesday, with a regularly scheduled press conference to follow.
Concerning the BOJ, we suspect that those on the monetary policy committee are still reeling from the response the market gave to their decision to move to negative interest rates. We suspect that everyone on the committee had expected the Yen to weaken… perhaps materially… because of their decision and instead the Yen rallied… even more materially then they had hoped it would fall.
Things, however, since have stabilized. The Yen has fallen back to the levels that effectively prevailed prior to the last meeting and we suspect that the Committee shall recommit to policies that will mandate a much weaker Yen. Certainly we cannot imagine the Bank moving to adopt policies that shall strengthen the currency, for that would be anathema… we hope
Regarding gold, it fell rather sharply late on Friday, which we see as an attempt, once liquidity was wholly lacking and most market participants had shuttered in their trading operations for the week, by what we have in the past referred to as “nefarious” forces to break the market. To a great degree their efforts succeeded and we were prepared to walk in this morning to see gold down sharply once again. It is not. It is holding and we take some solace in that fact.
We do indeed believe that the decisions made last week by the ECB are enormously expansionary and in the end inflationary, for the additional force feeding of €20 billion per month of “money” into the European banking system must be inflationary. It really cannot be otherwise, unless the banking system and money creation systems of the past have broken down entirely and that which we’ve come to understand as fundamental has now been rendered useless.