1.12 On The EURUSD Coming?

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.

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