Seeking Alpha
Currencies, event-driven, debt, commodities
Profile| Send Message|
( followers)  

This week we have meetings. of both the Fed and the ECB. There are vexing issues for Lady Yellen and her new group of voting Regional Bankers to address. Likewise, Draghi and friends need to also address some of the same issues. How can the bankers act to increase the lagging rate of growth? Both Central Banks CB's have been working on ways to achieve economic growth after the 2007 recession, and neither have found success.

Both bankers have embraced near zero interest rates although Draghi resisted because of German restraint. The Fed, compared to the ECB, has been far more aggressive in increasing the money supply. Through quantitative easing the Fed has supplied bankers and friends with an abundance of cash for successfully inflating the value of certain assets. Then the momentum players join the party and the additional cash injection creates demand for the asset de jour.

Problems resulted. Some of the players in this increase of free money get filthy rich but the elevated asset price can hurt many. For example, those in the US who drive or heat their homes in this cold winter, must pay twice what they did for energy in 2009. Food costs have also soared with live cattle hitting new highs. Meanwhile the price of chickens has also hit new highs, a consequence of expensive changes in EPA regulations that curtail production, and high feed and transportation costs. For many meat has been replaced by cheaper protein in their diet. Since food and energy costs are excluded from the cost of living numbers, the numbers do not reflect the change in the cost of living for the US poor and middle classes.

Washington does congratulate itself on the higher home prices, but this too has a downside. Though the higher prices does bail some banks out of their bad bank loans, fewer people are now able to buy. Citizens who used to be home owners are now renters. Sometimes Blackstone and other Wall Street operators had access to the QE funds. Again it is the middle class that suffered.

Perhaps because of these and other problems with asset bubbles the Fed has voted to reduce, ie taper, its activity. This is the market's expectations, however not all of the US numbers are good. Today's forward looking Durable Goods report was down 4.3$, lower for the second month. Three month's of down durable reports is a warning of a possible pending recession.

Should weakness in the USD numbers cause the Fed to flinch, and fail to continue the reduce the taper, the USD could be due for a tumble. Remember, our COT numbers show record numbers of USD spec longs against a number of currencies.

But does this make the EURUSD trading at 1.3650 a buy? An important report comes out in Europe at 0400. This is the EU-M3 Money Supply Report, and the report measures the total EU money supply. It is expected the M3 grew to 1.7%, up from 1.5% in the prior month. Should this number miss to the down side, this would be a sharp warning to Draghi, and perhaps even the bean counters at the Bundesbank, that deflation is lurking.

What good are low rates when there is no money to lend at those cheap rates? Has the public sector crowded out the private sector? For the creditor nations, such as Germany whose banks have loans in multiple directions, is the smaller money supply going to create zombie banks? Loaded with nonperforming loans, these banks are only able to re- write existing loans.

In summation, a 1.5% or smaller EU growth in money supply might be the clarion call for Draghi to honor his pledge to "do what ever it takes" to help the EU. From the EU's perspective, the expansion of the euro money supply, if necessary, would prove bearish for the EURUSD (FXE, UUP, UDN).

Will a small M-3 number make Draghi flinch, and will he commence with some type of easing? And with the Fed taper to continue we suspect the EURUSD will revisit 1.35.

(click to enlarge)(click to enlarge)

Source: Will The Fed Or The ECB Flinch First?