Central Bank Faith Teetering - Traders Call Draghi's Bluff on QE

The euro found itself at the mercy of U.S. political instability brought on by Special Investigator Robert Mueller announcing a wider investigation into Trump’s business dealings.

This is a clear example of markets being bigger than the people who think they control them.

Both central bankers were powerless to stop currency movements against their wishes.

I wouldn’t be saying this if the moves weren’t significant technically. As a financial and technical analyst, the moves in both the euro and the dollar markets were significant. And they haven’t reversed.

I wasn’t the only one who noticed. From Zerohedge on Friday:

Summarizing the market reaction, Yann Quelenn, a market strategist at Swissquote Bank said,“Draghi tried to talk the Euro down, even going so far as to suggest that ECB’s quantitative easing could be increased and prolonged. But the currency markets were not buying Draghi’s line, and neither are we. Available bonds are too scarce, and turn to a taper is too clear to disguise.”

The Fed got called in a similar manner in 2013 when they too ran out of bonds to monetize and had to end its QE program.

Read the rest at Halseynews.com
https://www.halseynews.com/2017/07/24/faith-central-banks-draghi-yellen/

For Steemian Eyes Only

This thesis is backed up by another post at Zerohedge this afternoon which details just how little wiggle room the ECB has, since it has bought up nearly all of the German bund market and will have to taper those purchases soon or GO Greek.

As a reminder, the current eligibility criteria (which admittedly can be changed) for government bonds is that they should be euro denominated, have a remaining maturity of 1Y to 31Y and an issue and issuer limit of 33% applies. The issuer limit is different from the issue limit as it takes into account central banks' holdings of government bonds outside of the asset purchase program as well.

Using ECB data, one can estimate the remaining eligible universe taking into account the reinvestment needs and the impact of gross issuance on the eligible universe. This is what Deutsche Bank has done recently, assuming that 70% of German PSPP purchases are in central govt. bonds with the remaining 30% in regional government bonds and local agencies. The bank then estimates that the remaining eligible universe of bonds is €114bn. Further assuming gross issuance for the remainder of 2017 and 2018 to be € 69bn and € 150bn respectively, I.e. a total of EUR 220bn, the eligible universe increases by 33% of this amount which is €73bn. This takes the total eligible universe by the end of 2018 to approximately €185bn.

http://www.zerohedge.com/news/2017-07-25/when-will-ecb-run-out-eligible-bunds-buy-here-math

When the ECB runs out of Bunds to buy, it will be revealed as the buyer of last resort and yields will have to start rising. The problem is that the market has been off-side for so long the likelihood of an ugly unwinding should shake the whole mountain of debt and derivatives, sending the euro plunging.

For now, with the turmoil in D.C. reaching a fever pitch as Project Impeach Trump puts on the full court press, the dollar is being pushed lower on debt ceiling fears thanks to a Congress priding itself on getting nothing done. This is their new calling, destroy everything to oppose Trump and any reform.

But, the same thing is happening in Europe on a larger scale. When the well runs dry, well you know the market gets thirsty quick when leverage is as high as it is.