1.12 On The EURUSD Coming?

Tyler Durden's picture

Back on January 16, Zero Hedge, once again just a "little bit" ahead of the general press posted an article titled: "A Shocking €1 Trillion LTRO On Deck? CLSA Explains Why Massive Quanto-Easing By The ECB May Be Coming Next Month." Today, the market has finally awoken to this probability following an FT article which comes to precisely this conclusion (not to mention an FTD article which throws around a €1.5 trillion number, which at this rate will soon hit the CS whisper number of €10 trillion). Of course, better late than never. But what does that mean? Reverting back to our trusty key correlation of 2012, namely the comparison of the Fed and ECB balance sheet, it would mean that absent a propotional Fed response, the fair value of the EURUSD would collapse to a shocking 1.12 as the ECB's balance sheet following this LTRO would grow from €2.7 trillion to €3.7 trillion. This can be seen on the chart below.

So while the media takes it usual 2-3 weeks to figure out what all this means, we will simply revert back to our analysis from two weeks ago, with the implications of what this action would be on the one undilutable currency, which incidentally explains why gold has soared to fresh 2012 highs:

...To fans of sound currency, the bottom line is that between the ECB (assuming it does proceed with a €1 trillion LTRO), and the Fed (assuming it does go ahead and launch a $600 billion minimum (and as much as $1 trillion) QE3 as every bank expects by June), the global balance sheet will have increased by nearly $3 trillion since July, even as gold has actually declined in price. And if anyone needs the final clue as to what is going on, an increase in the US debt ceiling to $16.4 trillion which is expected to pass imminently, would mean that by simple correlation a fair value for the yellow metal would be just under $2000 per ounce.

Got gold?

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ElvisDog's picture

Which would shift the imbalances even more towards Germany and away from the periphery.

trav7777's picture

wanna see somethin crazy?

go to kitco and look at a 6month chart of gold price in JPY vs USD.  The yen has been pegged to the dollar for at least that amount of time.

we now have a USD/JPY/CNY axis

ParkAveFlasher's picture

I haven't gone to kitco since Daniela Cambone stopped wearing lip gloss I mean since all my PM fell out of my pocketses on a gambling cruise excursion in Jamaica Bay.

ParkAveFlasher's picture

Trying to figure out why you think that's crazy.  I'm sure if you magnified the minute gaps between the zig-zaggy lines, THEY WOULD NOT BE SO CLOSE TOGETHER.

achmachat's picture

I quote you:"Got gold?"

I think it should say: "Got anything non-fiat?"

RockyRacoon's picture

Breaking news:  Get on down to the bank for some rolls of nickels.


An article on the bills introduced in Congress, which seek to change the composition of the cent and nickel to steel. Some brief comments are provided by the zinc association.

Anybody still think Kyle Bass is goofy?

EasterBunny's picture

SPROTT PHYSICAL GOLD TRUST PRICES FOLLOW-ON OFFERING OF US$303,800,000  174 koz of gold or up to 200k if fully underwritten


JTBfromtheWL's picture

Do tax-payers have to buy the auxiliary printing presses?

Money 4 Nothing's picture

No, They sent the contract offshore. /sarc.

l.hauri's picture

something auxiliary can help for sure.. I am sure that it will. greece sailing

Ghordius's picture

yeah, go Draghi, go? and what if Bernanke wants a rematch?


on a more serious note: this is all based on the assumption that the dear eurozone banks will soak up another 0.5 or even 1 Trillion AND that a QE3 of 0.6 to 1.5 Trillions is coming

all of it depends on the sovereign bonds sales in the eurozone and, if I understand Tyler correctly, on both the T-Bonds and stock markets in the dollarzone

lots of variables, lots of assumptions, though I find interesting that Tyler talks in another post about the EURUSD falling back to 1.31, so I assume he also looks it in USDEUR terms...

Coldcall's picture

which supports my theory that the eurozone will actually survive this because 1.12 will help the Italians and Spanish get some gdp growth, thereby making their debt profile seem less unsustainable.

They should have devalued a long time ago and then the eurozone crisis would not be quite as bad.

I'd love to see the eurozone crashing down but if they devalue the euro enough it may not happen.

JPM Hater001's picture


Euro is toast as people stop using banks and create a functioning black market on cash thus avoiding taxes thus further debt thus further printing thus further black market thus further tax avoidence...

This ponzi scheme will end.  And not well I might add.

SilverIsKing's picture

Before the ponzi scheme ends, we are going to get a huge short squeeze on the EURUSD.  Commercials are massively long the EUR while large specs are massively short.  We've seen this movie before.

steve from virginia's picture


The argument is the extinction of a currency is good for the economy that uses it  Hmmm ...

The euro is 'devalued' because pricing it at its true worth in the currency exchange would leave it at zero. At issue is whether there will BE a euro. The market knows but cannot afford to say because it cannot be seen to effect outcomes.

Keep in meind the UK has already determined the outcome by exiting the eurozone.

The ECB adding trillions to its own reserve account at a loss to depositors does not effect GDP anywhere, it's simply a sham.

Ghordius's picture

"the UK has already determined the outcome by exiting the eurozone"

LOL, I seem to have missed that one - or did I drop in a parallel universe?

where I come from the UK never entered the eurozone

Ghordius's picture

hemm... functioning black markets exist in the eurozone since before the EUR was introduced and they are slightly decreasing since at least twenty years, even though value added taxes are around 20% in most countries...

Max Hunter's picture

I agree Coldcall.. I've never understood how so many Europeans were happy with the "super" strength of the Euro.. It may keep commodities prices down but in the macro picure, above it's "fair" value, it hurts the economy.  They actually think the higher the EUR/USD goes the better it is for them. Nothing could be further from the truth.  1.15 is right around where it should be and I agree they could actually pull themselves from this mess if they let it go there - (could, being the key word in that phrase).

JPM Hater001's picture

Is no one paying attention?  A strong currency allows you to buy things for less...including raw materials and labor.  That keeps people happy and helps the economy.

Really?  You would be happier if someone just reduced the value of your money 15%?  Really?


I can't stop asking...REALLY?

Max Hunter's picture

YES .. REALLY... YES.. REALLY..   Nations are strong because they export more than they import.. Look at China.. keeps currency weak.. Look at Japan.. Keeps currency weak.. Much of Germany's boom is a result of the cheap Euro at the onset.. Now, they are in negative growth in manufacturing.. Ask the exporters of Germany how well the 1.6 EUR/USD was working for them.  You have to look beyond the ostensible advatages of a strong currency and take ALL factors into consideration.

So, instead of researching, just keep asking really..  

A strong currency yes.. a currency over-valued by 30-50%, NO..

Have you noticed the world talking about an artificially low currency being an ecomoc advantage?  Of course not, you are too busy saying.. REALLY...

Ghordius's picture

;-) just tell them to look up "mercantilism" on wikipedia - this trade doctrine is some 6 centuries old and worked with gold, too

JPM Hater001's picture

"Have you noticed the world talking about an artificially low currency being an ecomoc advantage? Of course not, you are too busy saying.. REALLY..."

Um, I think thats what everyone is saying about China if I'm not mistaken.  They have manipulated, by peg, their currency down.

And I never said over-valued was correct.  I said a strong currency was good.  Fiat currencies are bad because they can be manipulated...and always so down.

That is never good for the country.

Coldcall's picture

exactly, and good examples prroving the point. .

Coldcall's picture


Look, Spain and Italy have lost huge level of competivity because the euro is trading a level far too high for them to be competitive in global markets. This is not about their external purchasing power. Their debt is in euros so the lower the value the better that debt profile becomes. This is exactly what the Yanks and Brits have been doing, they are having a race to the bottom intentionally, which has trapped the euro at high value relative to USD and GBP.

Considering the state of the Spanish economy 24% unemployment, so you really think that a spanish unit of currency is worth 1.30 USD? Think about it carefully. While a German unit of currency is at least worth 1.30 USD, Spain is not Germany it is exponentially less productive and competive.

So worrying that with a weaker euro they would pay more for external currency purchases is total straw man, as until they get growth they wont be buying much of anything at all, no matter the external price. The lower euro would also encourage less imports, and boost exports.



Cole Younger's picture

And U.S. exports will tank...The FED will print with congressional support so your scenario is unlikely to occur.

Milton William Cooper's picture

A country's currency is like a corporations stock.


Would AAPL be better off if the stock was $300?


Stop the Keynesian nonsense that a weak currency is good. It's not. It's destructive.

Coldcall's picture

wrong, a currency is not a company stock price, another total straw man with no basis in reality.

misterc's picture

Off Topic: A warm recommendation for all German speaking readers, new Deichkind single "Bück' Dich Hoch" (rough translation "Beverly Hills ladder") on how to give everything for your company and employer to boost profit. Truly Inspiring!


Thomas Jefferson's picture

The Japs are going to be pissed.  Ben is just waiting for his chance.  He is going to drive rates negative when he clicks the buttons.

hedgeless_horseman's picture



Maybe so.  However, the Nips have no choice, as an export economy, they are compelled to participate in the synchronized diving.

Reverting back to our trust key correlation of 2012, namely the comparison of the Fed and ECB balance sheet, it would mean that absent a propotional Fed (h_h: and Nip and Limey) response

The only way we can all keep printing is if we ALL keep printing.

Mr Lennon Hendrix's picture

How do people lie to themselves about this economic policy not being destructive?  I know the people, the PhDs, and I am still not sure how they defend it, other than they are bat shit crazy.....

I forgot for a moment that their whole career rests on said lie.....carry on.

hedgeless_horseman's picture



I believe part of the answer is that these decisions are merely an offshoot of democracy; a majority will always elect to delay expense, effort, embarrassment, and pain when given the chance. 



trav7777's picture

read my post at the top.  The JPY is currently pegged to the dollar

Alchemist1's picture

How strong is the correlation between gold and debt though? IF you look at simple correlation of DXY and gold in last 20 yrs it's at 66% and implies Gold at 1100..

Tortfeasor's picture

What about DXY = debt to you? 

USD, EUR and yen could all be drowning in the ocean, sinking at breakneck speed, but neither one "outpacing" the other to the bottom.  That's the DXY for you -- everyone drowning at the same rate means little movement on DXY.

trav7777's picture

DXY isn't static over 20 years

Milton William Cooper's picture

DXY is over 50% Euro.....not telling the true story.....Aids patient vs cancer patient

LawsofPhysics's picture

Parity in ALL fiats, no one could have ever seen this coming.

francis_sawyer's picture

I might be wrong on his... But I think when the Euro was introduced, it was roughly $1.18 (to the dollar)...

So if you're talking about PARITY...

(I'm happy to stand corrected on that 1.18 number if someone remembers)...

LawsofPhysics's picture

Let me make it simple for you, all fiats going to zero on the purchasing power scale.  No doubt there will be some FX trades along the way, but turn the paper into hard assets along the way (preferably ones that also generate some revenue).  Such is the way with any race to the bottom.

Same as it ever was, only exponential more so.

francis_sawyer's picture

Your point is taken...

The only reason I was tossing out EUR/USD ratios was in trying to figure out what the basic balance point was...

IOW... In the "race" to zero, who's in the lead?... My feeling is that at some point in the race to zero (as you address), they will more or less COUPLE...

falak pema's picture

at a given point in time the race to bottom becomes comparing turds to toilet paper; you can have both as they naturally go together. Or you can be so poor that you have nothing to shit and you're too dirty for paper to be of any use. You need a bath but there is no water where you are; like in Tchad or Mali today. Welcome to fifth world of uber capitalism.

adr's picture

Actually, I thought the Euro was created at something like $.82 but was only available at that rate for FX trading. When the Euro opened for actual use as a currency, it did so at $1.18. Giving those lucky enough to start trading a nice profit, just like the IPO con game.

Max Hunter's picture

NO.. It was created and kicked-off with a 1.18 value.. It immediately dropped (over the first year) to .82 and has been climbing ever since.  I started selling machinery built in Germany in 2002.. It was around .95 when I first started my gig.. at least when I first started considering it.  Had I known it would steadily climb to 1.6 I would have NEVER done it. I don't give a fuck what anybody says, selling something for 100k built in Germany is a tough sell compared to something that sells for 60k (that can still do the job)built in America..  Sales can still be made, no doubt, but it's a much MUCH tougher sell.  Had the Euro stayed below 1.20, I would have become rich.. And the EuroZone would have exported far more..  The Euro strength (excessive strength) has certainly had a hand in its demize..

falak pema's picture

spot on in my book. On jan 1 1999 but it fell immediately upon introduction under Clinton, until 2001 when GWB came in like Nero of old and Rome started to burn as did the green back.

Fichier:Euro exchange rate to USD, JPY, and GBP.png - Wikipédia

lolmao500's picture

Bullish for treasuries! Ben will be happy!

mattu13048's picture

Sell the fricking dip!!!