QE & LTRO & Technical Analysis of EUR/USD

hello,

On the current situation on EUR/USD I have written several times recently.

Link 1; 8th December

Link 2; 11th December

Link 3, about LTRO; 17th December

Fed just starting to finish the third round of quantitative easing !

Analyzing examples of two previous programs QE1, QE2 and QE3 present, of which the current during a similar to the first, you can see interesting relationships.

chart 1. 10Y US Gov Bond Yield

Now both the QE1 and QE3 observed massive increase yield, among others, U.S. 10-year bonds. But what was closer to the end of the asset purchase program, the yield did not rise as rapidly as because investors able to discount this fact.

In turn, when the total end of QE1 yield fell sharply. If history is to repeat, it's been probably increase of yield, but in the long term may be limited. Meanwhile, being closer to the end of QE, the yield should stabilize and then decline <chart1>.

What does it impact on the currency? Well, the EUR/USD pair is correlated with yield of 10Y and the first end of QE the EUR/USD started to fall in price already five months before the end of the QE program <chart 2>.

chart 2. EUR/USD and 10Y US Gov. Bond Yield

The situation on the EURUSD finally begins to be clear. Naturally helped, the decision to reduce QE by 10 billion USD. Correlations between the EURUSD and the FRA market and with yield of 2Y US Gov Bond begin to show the same thing (and during the bullish EURUSD was not the case). As a result. differences in yields, the chart shows we have 2Y change in favor of the dollar and indicate the current level of just below 1.36 in the relatively near future, just as the market contracts FRA18x24 <chart 3>.

chart 3. 2Y US Gov. Bond Yield & EUR/USD 

chart 4. 2Y US Gov. Bond Yield & EUR/USD

In the long term, the potential is even greater, because the difference in yields indicates around 1.33 <chart 4>.  I expect that the ECB will not tolerate short interest rates at a level above 20 bps (month LIBOR for the euro, despite the slight withdrawal is still 20.7 bps against 16.45 bps for the USD)which should support realization of this potential in the coming weeks.

Technical analysis:

I think that an additional comment is redundant but  If you have any questions or comments please be free to write to me, always :)

chart 5. EUR/USD Daily, 2013-12-22

chart 6. EUR/USD H4, 2013-12-22

Economists surveyed by Bloomberg believe that the Fed will limit the QE for the next 7 sessions of 10 billion USD. In December of next year is expected final cut 5 billion, which will lead to zero QE program.


regards,
oscarjp

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