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26th January 2015
ECB: Doing “whatever it takes” in practice…

Last Thursday Mario Draghi the Chairman of the ECB announced a long awaited quantitative easing programme in the Eurozone. Speculatively, in order to test the market reaction and prepare investors the ECB leaked the board proposal for QE amounting to EUR 50bn per month a day before. As a reaction, GBPEUR dropped below 1.30 and EURUSD rose to high 1.1680. This allowed ECB to test the downside, assessing what size of the QE injection would be enough to weaken the euro further. Jared Dillian, the market commentator had a good take on this in his post - ECB Game Theory (available here):

 

“They leak 50 billion a month, and when they didn’t get desired market reaction (EUR crashing or whatever), they increased it to 60 billion a month. In the old days, if you were a central bank, you made a decision until the next meeting, or at least as long...



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19th January 2015
Three Takeaways from the Swiss Surprise

 

I happened to be standing on an FX trading floor in the City of London on Thursday morning, when the Swiss National Bank (SNB) shocked the financial markets, removing the euro-franc floor and pushing Swiss interest rates further into negative territory.  The crowded trading floor immediately fell into an edgy silence, as traders and sales dealers stared at their monitors trying to figure out what just happened.  The prices on their screens had frozen, as the market in both EURCHF and USDCHF temporarily seized up following a sudden 30% surge in the franc.  This was an incredible occurrence; markets in major currency pairs don’t just stop working like that.  Foreign exchange is the most liquid market in the world – it’s not supposed to trade like some esoteric structured credit derivative. 

 

However, it did happen. The global currency market in a two major currency pairs did (temporarily) stop working, and the...



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12th January 2015
2015 Currency Outlook

EURUSD – ‘Great Meta-Expectations’

 

“Mass psychology really is the key to determine price action, at the end of the day.”

Anonymous Foreign Exchange Trader

Quoted in the “The Psychology of the Foreign Exchange Market”

Thomas Oberlechner, 2004

 

EURUSD is going lower.  This is the accepted wisdom in the currency markets today, evidenced by the fact that a number of major investment banks (e.g. Goldman Sachs, Deutsche Bank, Citi) have now lowered their long term forecasts to below parity.  

 

Meta-expectations are the expectations of market participants about the expectations of other market participants.    It is such higher-order thinking that tends to drives currency markets, especially in the short term.   At the moment, everyone thinks that everyone else thinks that EURUSD is going lower.  So it goes lower.  We are in the phase of the trend where it is advantageous to be a trend follower, and this will continue to push the euro lower from here. 

 

The key question...



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