Hours ago, in addition to making Cypriot sovereign bonds no longer eligible as collateral at the ECB, the European Central Bank also announced something that received less attention, namely that its balance sheet rose by €31 billion in the past week (due to an increase in the MRO) to a new all time record high of €3.058 trillion. In other words, even as the Fed's balance sheet continues to be flat, or is even modestly declining, the ECB continues to pick up the monetary slack with all new fiat ending up to benefit the US capital markets.
Now as frequent readers know, this latest shift in the relative size of the two critical CB balance sheets also means something else: that the fair value of the EURUSD implied purely on balance sheet correlation, a relationship that historically worked perfectly, yet in recent months has broken down due to the market's conviction that more QE is coming any minute now, is now just above 1.16, or just shy of 900 pips lower from here.
In other words, if the Fed is content with doing nothing else, and forces the ECB to do all the unsterilized intervention going forward, the EURUSD has no choice but to go much lower. On the other hand, the fact that it still refuses to do so, is confirmation that the market expects much more from the Fed - roughly $400 billion based on the above correlation. So much so, that as observed a few weeks ago, the second the news breaks of more LSAP, the EURUSD is likely to soar by at least 400 pips, and that ignore the near record amount of shorts still embedded in the EURUSD position.
Place your bets.