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Mini-Money Monitor: The ECB and the 'Consistent Course'

By could become the next major market 'rallying-cry'!


The Japanese Monetary Base figures for March, released this morning, revealed the first contraction on a year-over-year basis in over five years, as noted below:

  • Monetary Base: 109.28 trillion in March, down 2.16 trillion yen from Feb's Base of 111.44 trillion yen.
  • Monetary Base: Down (-) 1.0% yr-yr, collapsing from +1.9% yr-yr growth in February, and marking the first contraction since January of 2001.
  • Bank Reserves plummeted by a nominal (-) 28.5% during the month of March.

As we stated a few weeks ago and now all the more evidently, the tide has turned, monetarily, in Japan.

Further, we note the People's Bank of China, who drained a massive 80 billion CNY from the money market this morning, twice the previous 'record' drain of 40 billion CNY, amid chatter about a hike in Bank Reserve Requirements to be implemented by the CB. The talk suggests that the Requirement Ratio will be lifted to 8%, from the current 7.5%, a level reached when the PBOC last hiked the Ratio in April of 2004. Subsequently, yields on the Chinese 1-Year Bill rose to 1.999% this morning, up from 1.987% last week, and the highest in almost a year.

Moreover, all this while word leaks from the European Central Bank strongly suggesting that a May rate hike is in the cards. Imagine, the Fed has long-ago moved, now the transition on behalf of the Bank of Japan is becoming more pronounced while a more subtle hint emanates from China, while the European Central Bank's stance begins to harden. A triple-play.

For sure, the latest macro-numbers on the offer from Europe would appear to support such a move, particularly as evidenced by 'strong' readings within yesterday's Purchasing Manager Survey results. In fact, according to "Market News Service (MNS)," a "senior Eurosystem official" and a "well-informed central bank source," the "economic data in recent days has convinced them" that a May interest rate hike would be appropriate.

Indeed the Fed had their 'measured pace' and now the ECB has 'used' the phrase "consistent course." You heard it here first; it could become the next major market 'rallying-cry'!

We might suggest the following consistent market course as a result of a move towards a consistent monetary policy course by the ECB, a TREND in the EUR to the upside against the USD specifically amid a major transition in the interest rate differential. First note the push higher in European forward implied yields as defined by the December 2007 Euribor Deposit Rate, shown below, exploding above 3.75%, pointing to a consistent course, higher in rates, over the next twenty-one months.

Then we note the EUR versus the USD with a clear-cut short-term upside breakout pivot evident at 1.2210, as defined by the most previous swing high. In fact, that high now coincides with the flat downtrend line in place since last summer, a line that has 'contained' the EUR for the last year.

A lengthened daily perspective, as seen in the chart below, reveals the more significant upside technical pivots, defining both a major inverted head-and-shoulders 'bottoming' pattern and a longer-term EUR downtrend.

Simply put, a move above 1.2340 would constitute a significant technical breakout for the EUR versus the USD.

When we look at the weekly chart (NOT Daily as marked) on display below, we become even more enlightened as to the potential for a consistent course higher for the EUR, in the context of a continuation of a longer-term bull market. The year (+) long decline in the EUR appears to have been a text-book Fibonacci retracement/correction and a push higher would recycle positive readings in the Moving Average AND the Oscillator.

Rewind and note the following headlines blasted across the first paragraph of the Eurozone Manufacturing PMI Survey (their caps, not ours):

  • "PMI CLIMBED TO A FIVE-AND-A-HALF YEAR HIGH IN MARCH. The upturn in the PMI reflected a marked acceleration in the rate of growth of manufacturing output to the fastest pace since August of 2000."

Demanding we respect the credibility of the data is the fact that the one-time lame-duck, downside leading core German economy is now leading the charge to the upside, as is specifically and repeatedly noted within the PMI Survey. Evidence the following passage(s):

  • "Germany recorded the strongest growth for the fourth straight month, showing the fastest expansion since April 2000, followed by Italy, which recorded the best growth since August 2000."

And most pointedly we observe the continued improvement in the European labor market, as reflected by the PMI Survey text:

  • "Employment was commonly boosted in response to growing backlogs of work. The amount of work outstanding rose for the ninth months running, increasing at the fastest rate since backlogs data were first collected in 2002. Germany again saw by far the strongest rise."

And then there is 'inflation-soft' Sweden, which revealed the following figures within their own PMI Survey:

  • PMI Activity Index … 62.5 … up HUGE from March's already strong reading of 58.5, marking a two-year high. Moreover, the Employment Index rose to 55.8, up almost two full points from March's already strong 54.0.

Indeed, inflation-soft Sweden (ie: meaning LOW readings in CPI, and core-CPI) is JUST like China, Japan, the US, and Europe, given the Riksbank's rising monetary anxiety as relates to the risk posed by run amok, particularly as applies to the housing sector. Note the comments made this morning by Riksbank Chief Stefan Ingves:

  • "It is the entire path for inflation that is actually important in monetary policy decisions. We cannot ignore the risks to future inflation with which we believe that developments in the housing market are connected."

The Riksbank 'has' something that the European Central Bank does not currently 'have,' a 'real' short-term rate in excess of +100bp, and rising.

We expect the ECB to be able to say the same, sooner rather than later.

We are bullish on the EUR against the USD, expecting the 1.2210 level to 'fall,' followed by a move to key overhead resistance defined at 1.2340.

Indeed, we expect a 'consistent course' higher, in the EUR-USD.

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