On April 4, 2012, the Chinese newspaper, ChinaDaily, published a piece titled, "US Urged to Consider Effects of Policies."
Within the article I noted the withering green shoots in the U.S. would likely result in QE3 for the U.S. This view passed Thursday.
China has reacted to U.S. QE in the past by expressing dismay, primarily given the overweight U.S. dollar position in their foreign currency reserves. Today's action, coupled with the signing of the ESM law in Germany by German President Gauk, is likely to bring China back to the European debt table. I would not be surprised to hear of Chinese institutions on the bid in the EUR/USD over the next few weeks. They will likely be joined by their Asian neighbors, as South Korea, etc., seek to limit the appreciation of their own currencies.
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.