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GDP for the Eurozone before the crisis and since Euro inception remained positive and healthy as it ranged above 0 to 1.5 but since the crisis, GDP has remained depressed.

Further, credit growth for March 2015 to residents was 0.4%, 0 previous and negative 0.2% annualized yet negative 0.5 February. The growth rate of short term deposits other than overnight deposits was negative 3.3% March 2015, negative 3.2% February

The focus on CPI as a factor of the lower exchange and interest rate lost its concentration as it was immobilized by the adoption of QE and a rising money supply. M1 increased 10% March 2015, up from 9.1% February but comprehensively M2 rose from 9,500,000 October 2014 to current 9,754,416. Overall, as money supplies rise, CPI remains depressed. The component contributing to the negative 0.1% annualized Inflation rate is rising commodity prices as food Inflation rose to 0.3% from previous 0.1%. But Core Inflation has been negative since Q4 2014. Draghi's recent press conference mention to take a harder look at CPI was articulated for good reason.

The recent central bank obsession with CPI is due to QE programs. Generally, as money supplies and velocities grow due from QE, CPI has a tendency to remain depressed. A gap is created between low CPI and money supply growth. Japan's M2 money supplies and BOJ balance sheets has been rising on a beautiful trend line since 2008 but GDP growth rates ran 50 / 50 as 14 positive quarters were reported Vs 13 negative. Core Inflation was positive all 2014 but mostly negative since 2008. The BOE's balance sheet as well as M2 has been rising since 2008 while Core Inflation dropped to 1% current since it peaked in 2011. M2 in the Eurozone resembles Japan as both rose on a skyrocket trend line while the ECB;s balance sheet dropped from 2012 but is heading hgher as QE progresses. The risk to Inflation Vs money supply growth is hyperinflation or deflation and is seen in the overall price level. One surprise tradgedy in the world can spiral prices out of control and resigns central banks to crisis management. Just as imporatant is the monitor of CPI due because QE is a new program and monetary policy has lags, generally 6 - 9 months. Within the confines of CPI and money velocity is found the work of Gesell.

The Euro and Europe had possibilities because to lower the deposit and exchange rate would provide a powerful economic base to produce terrific economic growth in the future despite the negative economic effects short term that would be seen in fundmamentals and yields. Prices, GDP, interest and exchange rates would all bottom and trend higher for many years but then the ECB acquiesced in the sledge hammer policy in QE.  Where QE is seen predominately is in the Deposit rate as rising money supplies depresses interest rates. This situation affirms cheap money.

The deposit rate or Eonia, Europe's Overnight rate has been positive in only 29 of the last 167 days since September's announcement to go negative and those 29 days were found in the beginning of September. Every average dating from 1 year to 1715 trading days or 7 years out and constructed based on 250 trading days for each average reveals not only a downward trend in its infancy but not one average of the 7 is overbought. Further averages from 20 to 100 days also reveals a trend in development and not overbought. Every target in each average ensures Eonia remains negative for a long time in the future. Median Lines as well for all averages affirms Eonia remains negative. For Eonia to turn positive from current -0.027, the 1 year average must break at 0.007. If money supplies rise and QE remains then Eonia continues as policy to affirm negative for longer.

For EUR/USD, the next averages above the 50 year is the 45 year average at 1.1577, 40 year 1.1689, 35 year 1.1628, 30 year 1.1977 then 25 and 20 at 1.2253 and 1.2202. The most important point is the 50 year at 1.1372. A break in the opposite direction would be an important development however higher exchange rates is not what the ECB wishes nor is economics on track yet to warrant a higher exchange rate. The GDP target is predicated on a lower EURO but not a Euro that gets ahead of itself. A higher exchange rate is actually paradoxical to the current QE and negative interest rate policy. The targets are many and begin at 1.0703, 1.0513, 1.0326 then targets range from 0.9721 and 0.9791 to the lowest current points at 0.9372 and 0.9376. Despite a 3400 pip run over 12 months, the EUR is in quite a different location than has ever been known since 1998. For a major currency to run 3400 pips in 12 months is quite a statement.

The risks to a short Euro and the ECB strategy is the FED. Fed Funds effective at the last Fed meeting was 0.13 and rose from 0.10 since the last meeting. Before Yellen can raise, Fed Funds Effective must travel higher to an acceptable Fed level so the next raise is supported by a higher Effective rate. The point at 0.13 just graduated to this new level April 13 to offer context. Possibly a hike comes when Fed Funds passes 0.15 and heads to near 0.20. Either way, the short EUR trade remains.

Brian Twomey
author of
Inside the Currency Market: Mechanics, Valuation and Strategies
and
Using the Z Score to trade Foreign Exchange and Other Financial Instruments: The Step by Step

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