The Draghi Put Returns To The Euro After Cyprus

Includes: FXE, GLD, SPY, UUP
by: Tom Luongo

Make no mistake, nothing is fixed in the eurozone. No matter how much ECB President Mario Draghi postures about there being no "Plan B" if a country tries to default and leave the euro, the reality is that the possibility of it happening is non-zero. Now, that said, will nearly anything be done to ensure that Plan B never needs to be invoked? Yes. Will the technocrats and Eurocrats that make up the leadership in Brussels care about who is sacrificed on their alter of European unity? No. We've seen the playbook in Greece, Ireland, Portugal, Cyprus, Italy and Spain. The euro is more important than anything else in the world. Such is the hubris of central planners and such is the reality of the world today.

Euro bears better get a raincoat. Like last July 23rd, Draghi's comments yesterday made it abundantly clear that nothing will deter them from keeping the eurozone intact. And also, like July 23rd the euro put in a significant bottom and began moving higher. Economic law may eventually catch up with them and the more they tighten their grip the more catastrophic mutations like Bitcoin may arise to subvert them, but for now, like it or not, everything is proceeding apace.

The reversal in the euro, which started on Thursday April 4th, is not just a function of the shock and awe created by the Bank of Japan's new quantitative easing program. It is a reflection of the ECB standing firm in its policy statements and the knowledge that as bad as things may be for now they are managed and the reality in the U.S. dollar is getting worse.

Honestly, the euro has had nearly everything thrown at it possible in the past 12 months and still it is trading at $1.30. That is impressive resiliance. The slightest hint of stability with respect to the dollar sends the EURUSD soaring. This isn't simple short-covering but an acknowledgment of the fragility of the safe-haven status of the dollar.

The employment data released over the past two days in the U.S. finally reveals the nature of a rally born of rampant money printing, namely that it is unsustainable. U.S. equities can only run on junk food for so long, eventually there is either earnings growth or there isn't. Like it or not, but a labor force participation rate that harkens back to the end of 1970s is not a bullish leading indicator. If this week marks the end of the beginning of the end of the equity rally in the U.S. then the Fed will have a Herculean task ahead of it to defend the dollar in the face of a euro that has survived its latest potential shock.

The price action in gold to end the week is suggestive of an end to the bear trade, but we've seen this story before. Like the Eurocrats with respect to the EU, the Fed is determined to break the price of gold to continue to project calm to markets that are anything but. They were okay with a tactical retreat in gold up until the peak at $1926.

Since then it has been all-out war to hold the price of the metal in place. Since the failed breakout at $1696 in late-January, the stakes have gone even higher. But, like the EURUSD falling and the S&P 500 (SPY) rally, this is a trade that beggars logic and no matter how tortuous the bear argument against gold becomes, the fundamentals state quite plainly that the action in the futures market bears little resemblance to reality.

Today's spike in the price of both the euro and gold to end the first week of Q2 should be a warning. The Draghi Put is still in place, the U.S. economy is fundamentally weak and the era of rising gold is nowhere near over. Position yourselves accordingly.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I own physical gold, silver and a few dairy goats