The speculation about the Swiss National Bank (SNB) knowing something when they de-pegged the Swiss Franc from the Euro proved true today as the European Central Bank (ECB) launched its own QE today in the form of a 1 trillion euro government bond buying program - approximately 60 billion per month, which is more than the 50 billion people were conjecturing.
This program will start in March 2015 and go through September 2016. This is the ECB’s latest attempt to battle deflation and try to reflate the Eurozone. On the heels of this news, the Euro sank to 1.14, gold touched US$1,300 for the first time since mid August, and the USD surged to 94.72 (see charts below).
Also, The People’s Bank of China (PBOC) is injecting 500 billion Yuan (US$81 billion) into the nation’s largest banks, according to a government official familiar with the matter, signaling the deepest concern yet with an economic slowdown. Not to mention, Canada also slashed interest rates today as well.
We are witnessing unprecedented global stimulus to fight a major economic slowdown. Under this backdrop, it is easy to see why the USD is surging as the US has stopped QE and indicated a rate hike at some point this year. The US is perceived to have the strongest economy in the world.
As mentioned in previous articles, the USD is controlling the intermarket picture. The 15 year monthly chart shows the USD at a place it hasn’t been since 2003. Perhaps parity with the Euro will happen once again. This move is a major one as the chart below is a monthly chart and at the bottom right the 50 month moving average looks ready to cross the 100 month moving average. This is significant and proves this major uptrend is just starting.
The 5 year monthly Euro chart is almost a mirror reflection of the USD. It has blown through all major support areas. I drew Fibonacci retracements in to look for possible support areas and 111 and 104 seem like the next major areas of support.
In Spite of USD strength, gold has surged higher. The reasons for this are obvious: global deflation, global growth slowing, currency debasement globally (in fact Gold in Euro and Yens terms has been surging for a while), and doubt about the US recovery.
Expect to hear the term “currency war” in the coming months as all the liquidity being provided by central banks causes massive displacements of capital. If the dollar continues strengthening, the rally in gold should be capped. At the bottom of the gold chart, where there was once a strong positive correlation with bitcoin, (eaning gold and bitcoin went up together) now we are seeing the exact opposite - a negative correlation - where gold is going up and bitcoin is going down. It seems like gold is being considered a superior store of value and flight to safety along with the USD.
As noted in previous articles, the end of July into the beginning of August is when the USD dollar started surging along with the Shanghai Composite. Gold held steady within that period and in the last month has begun its own up move. Bitcoin has dropped tremendously in that time frame and is trying to find some stability. For now, this pattern still holds. Money is flowing into other asset classes.
Many people predicted the end of the dollar, a European banking collapse, and global depression. This scenario has not played out as global central banks have launched stimulus effort to fight off deflation. The US is the only one not stimulating the dollar and the US stock market has been a major beneficiary.
Perhaps the collapse of oil, coupled with the worry of the ECB, the PBOC, and SNB, along with a whole host of other countries has left an interest rate hike on hold for the “foreseeable future.”
What this all means is there’s a whole lot more liquidity sloshing around the globe and it is seeking places where it will make big returns. So far, bitcoin has not been the beneficiary of this. As I have mentioned in a previous article, the price is still searching for a bottom. Bottoming is a process and does not happen over night. In the mean time, there are a few headwinds that need to be overcome in order for the BTC price to stabilize.
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