The Case for a Higher EUR/USD

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The ECB's Bond Buying Scheme was leaked this morning and offered a few details.

1.) Bond buying will be unlimited and sterilized.
2.) The ECB will apply conditionality but not seniority.
3.) There will be no public yield caps.

The EUR/USD is rallying on the news. I have argued for some time that the EU and the ECB have been steadily working behind the scenes over the summer months. This has brought some support to the EUR/USD.

A number of other observations provide further support to my view that the EUR/USD will remain bid, further mystifying most currency dealers who continue to call for an imminent EUR/USD collapse and GREXIT.

The two-year EU/USD Basis Spread is now at 39.75bps. This was last seen on Sept. 1, 2011, when the EUR/USD was trading at 1.4200.

Optimized moving averages indicate that trading the 16 DMA against the 70 DMA over the past year would have yielded the highest return -- around 17 percent.  These crossed a few days ago. This will see model funds begin to cover shorts in the EUR/USD and start to accumulate long positions.

With the right action -- action that does not increase the ECB's balance sheet -- I can see a swift move higher in the EUR/USD. This is certainly not because Europe is "fixed," but rather because the "fear of imminent collapse" in the EUR/USD will be unwound.