Open an account with AMP Futures

Turning Traders Into Professionals

22/12/14

Very short week ahead, with few releases and no notable speakers.

EURUSD is still being weighed upon by a looming sovereign QE program that Mario Draghi wants to implement in the New Year. This has been the running theme of the whole of 2014. For those not too familiar with fundamentals and why things are happening the way they're happening, here's a bit of history as to why EU officials might be against QE.

Going back to the time after WWII, Germany went through a period of "printing money" ie Quantitative Easing policy to try and repay their debt. What resulted from this was a mad hyper-inflation with groceries costing into billions of deutsch marks and still going up by a few billion by the evening. As a result of this history lesson, Germans deemed any QE programs illegal for themselves in the beginning, but as Germany rose to the top of EU, this stance was adopted by the rest of the European council.

So naturally Angela Merkel is of opinion that a similar hyperinflation will happen again to the whole of Europe. The first debate is whether EU should change the law to make QE legal - after all we now have faltering EU recovery and no real way out of it.

On the other side of this table sits Mario Draghi, a true genius who came up with LTRO program and single-handedly saved Europe from being doomed.

Now let's take a look at a modern example of QE.

If you followed the markets even a little over the last 4-5 years, there was a lot of talk about American QE program. The Fed ran an aggressive "money printing" policy from November 2008 which had no effect on the US inflation at all. The Fed continued to pump $85 billion every month into the banking system, eventually causing stock markets to turn bullish and go on a mad run for 6 years. Before QE, S&P500 index stood at $738. It's now at $2074. Markets almost tripled with very little correction and for now, no real sign of this trend coming to an end.

But the reason behind this rally was a little bit suspect: none of the cash injection reached further than the businesses. Consumers didn't get a sniff of the funds. So QE kept large companies in the game, expanding and growing, but your average disposable income was unchanged.


Even so, Fed's QE proved that a country can print money without adverse consequences to inflation. In fact, US QE is now considered a success, with jobs numbers being back on track and economy largely recovered. However, the Fed decided to keep interest rates at historically low rates, which might be the reason for the lack of inflation. I expect them to do a rate hike in the spring 2015 and we'll see whether the equity markets can sustain their gains even after the rate hike.


So perhaps now we have a successful model of QE, especially if the correction after the rate hike stays limited and above 200 DMA, a model upon which Europe and Mr. Draghi can use to guide EU through another modern QE process in a bid to preserve the economy. All eyes on Super Mario.
 
Red tie or blue tie?