March 2015


Technical Analysis

Since the breach of the support at 1.120/1.130 levels in February, EUR/USD continued its bearish movement until 1.046, finding a strong support and bouncing from its descending trend line. 
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This upward movement was reinforced by the brake of the 50 SMA, having EUR/USD reaching 1.105. For now, this correction was contained by the 100 SMA 100, signalling a possible return to its bearish movement. If EUR/USD breaks the support given by the 50 SMA, we can expect a descending movement, and the retesting of the 1.046 support level, with eyes on parity. If it breaks the resistance given by the 100 SMA, we may well see EUR/USD continuing its correction up to 1.120/1.130, but should not go higher than these levels.




Fundamental Analysis

The EUR/USD reached its lowest value since 2003 (1.0497), closing at 1.0739. Nevertheless, Euro climbed from 1.0596 to 1.0850, on the 18th, following the ECB’s publication of the Euro Zone economic performance in the 4th quarter of 2014.
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Europe’s unemployment reached its lowest value since August 2012, supporting the Euro. In the US, unemployment claims were better than predicted, with an actual 282K against the 291K expected, and the Core CPI was greater than expected, reaching 0.2%. Meanwhile market participants await Yellen to be more precise on the next increase of FED’s interest rates. She recently pointed out that market-based measures of inflation have declined since last summer, driven by changes in risk premium and market factors. Notwithstanding, FOMC expects that inflation will reach the 2% goal over the medium term.




ECB's Quantitative Easing 

The Quantitative Easing program was announced on 22nd of January 2015, just one week after the Swiss Central Bank decided to remove their currency peg (highlighted in our January report).
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In the QE program, Europe’s Central Banks create an additional supply of money for corporate banks, and consequently the Eurozone. Securities of its member states - mainly long-term sovereign bonds are bought. The increase in money supply leads to a depreciation of the Euro. It is expected to put further downward pressure on interest rates, which are partially already negative. This shall give more incentive to invest in Europe and help the Eurozone back to economic growth. After 18 months, more than 1,140 billion will be injected in the economy, representing 12 % of the GDP of the Eurozone and 14% of the bond market. The market was expecting the announcement of extensive QE program, but the timeframe over which the QE will be conducted and its size exceeded market expectations. The program, also known as Public Sector Purchase Program (PSPP), has been finally launched on the 9th of March 2015, and the market reacted with caution as main European Markets dropped the day of its implementation (FTSE 100 fell 0.59%, while Germany's DAX dropped 0.39% and CAC 40 fell 0.61%). Despite that, effects of the policy started to be visible few days later, as illustrated by the drop in interest rates of sovereign bonds (German 10 Year bonds dropped from 0,4% to less than 0,2% in one week, French 10 Year bonds’ rate also decreased at 0,48% while it was lying above 2% less than two years ago) and the large impact on the equities market with the German DAX reaching an all time high above 12,000 points, and CAC 40 sustaining an 18% increase since January up to 5,000 points, level not reached since may 2008 and the premises of the crisis. Concerning the EUR/USD exchange rate, it has reached a 12-year low on the 11th of March 2015, and is facing a consecutive drop against dollar for 9 months in a row.
Nevertheless, reactions from the actors of the market differ as the ECB is insisting to confirm that the impact of their policy on the exchange rate is not one of the objectives but rather a side effect.
Some analysts have a different view about ECB’s intentions “Investors believe that the ECB is targeting [EUR/USD] parity,” said Sebastien Galy, Senior Currency Strategist of Société Génerale, referring to a survey of their clients. The Deutsche Bank forecasted EUR/USD parity to be reached by 2017, but recent events have lead to a re-evaluation of their previsions, expecting parity at the end of 2016. However a weak euro has also side effects alongside of improving the attractiveness for European-manufactured goods and thus the trade balance of the Eurozone; "This step destroys the trust in a stable currency that is necessary around the world and endangers European unity," says Anton Börner, president of the Federation of German Wholesale, Foreign Trade and Services, criticizing the fact that these benefits are short-term orientated and that it would represent a sign of weakness and fragility for the European Union in the future.
Economist and Professor Daniel Cohen believes that this intervention is “a good thing to see ECB take action” but that it is “coming too late”. Bond Market expert and PIMCO co-founder Bill Gross shares this opinion: the QE should have been implemented earlier and on a larger scale. Gross expresses doubt on the QE’s efficiency in comparison to the results of this policy in the US: banks will not have an incentive to lend this new flow of money, at the current low (negative) level of interest rates. The director of the French Economic Observatory (OFCE), Henri Sterdyniak, questions existing demand for additionally promoted bank loans. Many scholars seem to doubt that the monetary policy will have the same positive effects, as when applied in the UK and the US. In the US, it led to a significant smoothing of the post 2008 crisis investor’s risk aversion and it helped UK’s Central Bank to recover from inflation and to decrease uncertainty in stock markets. Different experience has been made when applied in Japan. Although the BoJ purchased securities, represented 26% of their country’s GDP, some consider that the policy should have been more ambitious and consequently. The guardian summarizes the different effects the policy had in Japan, US and UK. Further additional sources on the QE written by the Financial Times can be found here.