EUR USD hits 11 year lows

EUR/USD tumbled by another 200 pips to hit an 11-year low at $1.1460 as the US dollar broadened gains on traders’ increased realisation that yesterday’s Swiss National Bank decision to end the EUR/CHF peg was an implicit vote of confidence for the US currency. As the SNB halts purchases of German bunds and other Eurozone assets, it will partly shift towards buying US bonds and other high quality US assets.

Size specification

Reasoning that the SNB decision is aimed at aimed front-running a large QE program from the ECB next week is based on the argument that ECB balance sheet expansion would be a euro-negative. The ECB would not only have to announce the start of outright monetary transactions, but specify an preliminary amount of at least €750-€800bn in order to garner any credibility in its war against deflation.

The need to specify the amount of planned purchases is crucial since ECB president Draghi has already mentioned he planned to lift the balance sheet back to the days of 2012, when it was at €3 trillion, compared to the current €2.2 trillion. Managing bond traders’ expectations will be paramount in getting anywhere to raise inflation expectations.

What if they disappoint?

ECB president Draghi cannot afford to disappoint next week. A disappointment is considered as remaining vague on details of the QE and/or announcing modest amounts, such as less than €500bn, while the most extreme type of disappointment would be to not even announce any plan of asset purchases, which is highly unlikely.

Any disappointment along the lines of modest amounts could trigger a short-lived euro rally, which would later be followed by fresh selling on the realisation that the single currency has little to run on besides deteriorating deflation and negative interest rates.

The mother of all moving averages

Having breached the 200-month moving average for the first time since late 2003, EUR/USD faces its next destination towards the November 2003 low of 1.1380. Over the two last major down-cycles in EUR/USD, the pair fell 26% from its 2008 highs to 2010 lows, down 19% from the 2011 highs to 2012 lows and now is 18% from the 2014 lows. For these cyclical declines to be in line, EUR/USD could extend losses to as low as $1.1150.