Shock Eurotherapy and Greek Dessert

At the opening of the week and after fixation of positions opened in the expectation of the Suday election, EUR/USD left 11-year minimum
Judging by the rapid devaluation of euro, the trust to the last ECB argument is minimal. Purchase of bank bonds with negative profitability will not save the economy, and will not cause structural changes, although stock exchange assets will grow. Draghi is trying to buy time, postponing real decisions; it is with good reason that the final date of QE is not specified (i.e. - it is conditionally infinite). And it is just when Greece is aggravating the problem.

ОThe volumes of the present banking and debt bubbles of Eurozone are difficult to even assess and the negative yield of Swiss, Austrian, Danish, French, Japanese state papers can go off at any moment. If attempts to reverse it from low levels to at least normal are made, banks will have to increase mortgage assets seriously. Moreover, it will have to be done with the help of real money and not with papers printed during a new issuance. Despite the decrease of the key rate and increase of the announced easing volume, there is still no enthusiasm regarding loans. As an indicator - asset purchases have been going on for a half a year, and ECB balance does not even show a growth tendency.

From the moment of the 2011 bank panic, investment funds and banks, large stockholders, trading operators, and ECB reached a private agreement regarding holding the market at any price. Stock and debt assets grew due to this agreement and support from the Central Bank, they were mainly super-reliable German bonds, while the assets of countries that are weaker financially sold at "garbage" prices in huge numbers. If before, financial injections went through credit lines, it is a common practice now to work using FRS technique - through issuance, not secured or covered with poor quality assets. Here is the difference - real loans have interest rates, dates, and mortgage, and QE is free and has no conditions or dates. That is some kind of legal monetary gangsterism. In principle, the market does not care where a money flow comes from: a real economy, household injections in investments, or central bank's printing press. The principle of coordinated issuance that is actively used now must deliver the volume of not less than 1 trillion dollars a year to the market or the system will lose stability. The Federal Reserve has stopped its injections in liquidity for now - ECB and BOJ have begun the work. We can't assess the result of their work yet, that is why FRS will hardly make the decision regarding its rate in the nearest future. The present market balance after closing of American QE, taking into consideration the previous fall of euro, stays only on ECB QE. It is clear that players are directed to the effect of the 28 January meeting; however, we should not expect any serious decisions from it. Practically neutral protocols create the opinion that FRS is simply in search of "decent" economic reasons in order not to raise rates this year at all.

As for Greece, the market was waiting for this result and has partially worked out at the present rate. Against the background of the economic failure caused by anti-social and anti-economic policy imposed on the country for receiving an IMF loan, left radical politicians are coming to power, who both don't really want to leave Eurozone and can't work, and will not bear responsibility for the existing problems either. The conflict with international creditors is inevitable; moreover, ECB is not yet ready to participate in negotiations regarding the reforming of the Greek debt. The possible manifestations of revolutionary solidarity in the countries that are Greece's neighbors do not arouse concern while there is a hope for a better friend - ECB assets. The regular period of a new series of the Greek crisis is not less than a year, and all that time euro will be seriously "ill", taking more and more funds from the long-waited QE for its treatment. The final solution that it is easier to forgive Greece's debts and expel it from Eurozone than to keep on feeding it will be delayed for an indefinite period of time and can cost Europe an arm and a leg.

At the opening of the week and after fixation of positions opened in the expectation of the Sunday election, EUR/USD left 11-year minimum; however, it does not suggest optimism. Now, Europe, as well as Japan, needs to weaken its currency continually in order to hold the national GDP at the expense of exports and ease servicing of sovereign dollar debts. This way, parity to dollar is much closer than it could be expected.

Author: Lachlan Patel,
ForexChief Currency strategist