EUR/USD: A Matter of Time & Bears Might be Trapped

Traders' Opinions

Summary:

Selling at the bottom might be a painful experience for EUR/USD traders. The EUR is expected to bounce back up due to the recovery plan that the central bank might launch soon, and the fundamentals in the upcoming weeks.

Fundamentals

Big Data will be released on the afternoon of September 15, 2022, with the initial jobless claims taking the lead. The initial jobless claims are expected to be released at 226K increasing from 222K from the previous result. A higher-than-expected result is considered bearish for the USD, thus driving the EUR/USD pair up. A lower-than-expected result is considered bullish for the USD, thus driving the EUR/USD pair down.

EUR/USD: A Matter of Time & Bears Might be Trapped_1

EURUSD Pair Upon the Release of Last Month’s Jobless Claims

Last month, it was expected that the jobless claims to be at the 240K level, however, the actual result was surprisingly at the level of 222K which is bullish for the USD. From the graph above, it is crystal clear the drop in the EURUSD pair by almost 100 PIP is due to this surprising event. Governments, traders, and banks are waiting patiently for this data to be released as it has a big impact on the market and might issue the direction of this month’s trend.

In addition to the jobless claims, another important fundamental will be released as well at 4:30 PM (GMT +4) which is the “Core Retails Sales”. This indicator is expected to be bearish for the USD as well at a 0.1% level. The whole market and indicators is showing a strong bullish trend in the near future for the EUR/USD pair, and traders might be careful and take a look at the indicators before digging in.

Technical Analysis

EURUSD Weekly Chart

EUR/USD: A Matter of Time & Bears Might be Trapped_2

EURUSD Weekly Chart

The weekly EURUSD pattern shows a strong bullish engulfing with possible prices touching the 1.1500 level in the upcoming weeks.

Support and resistances:

0.9979

0.9966

0.9957

Pivot: 0.9987

1.0022

1.0008

1.0000

Trading Recommendations

High Probability Scenario:

Short Below: 0.99522

Support TP1: 0.99319

Support TP2: 0.99146

Alternative Scenario:

Long Above: 0.99901

Resistance TP1: 1.00099

Resistance TP2: 1.00340

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

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Devin

Markets left to their own bearish devices, but supply abates

With US inflation reports out of the way, and little by way of events until then, focus is turning to next week's Federal Open Market Committee meeting. Hard data from the US, in the form of August retail sales and industrial production, are the exception. They could dispel the impression that the US economy is going from strength to strength if, as expected, they show a slowdown from July. Our economics team expects a strong 3Q, however, which should in turn be of little help for bond markets trading mostly on macro drivers.

Thankfully, technicals might lend a helping hand. The end of this week's supply slate should help bonds regain their poise after a bruising week. We may have seen this at play already with the long-end bond rally late in yesterday's session.

Lane joins the hawks, and collateral scarcity remains unaddressed

In Euroland, European Central Bank Chief Economist Philip Lane seemingly endorsing the hawks' narrative in a speech is another clue that the central bank has experienced a significant shift in its reaction function. This is no guarantee of ever-increasing interest rates, but this means that the hawkish skew in the market reaction to future economic releases should be stronger than in the past months. Realistically, we won't get much evidence of that before the European PMI releases at the back end of next week. Until then, EUR markets will be at the mercy of moves in their USD and GBP peers.

Lane's speech was also a reminder that collateral scarcity issues will remain despite the ECB offering a delay to governments in finding alternative avenues to place their liquidity. Until April 2023, they will continue to earn the euro short-term rate on their deposits at the central bank, which at least delays the time when more demand emerges for already scarce collateral. What the ECB has not addressed, however, is the initial collateral shortage, which Lane blamed in part on interest rate uncertainty and rates volatility.

Source: ING

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Kevin Du

The blockchain network completed the crypto world's biggest and most ambitious software upgrade to date, according to its co-founder Vitalik Buterin in a Twitter post on Thursday (Sept 15).

Called the Merge, it replaced power-hungry computers that were used to order transactions on the network with a more energy-efficient set-up using piles of the network's native token, Ether, placed in special, so-called staking wallets. As a result, Ethereum's energy consumption will decline by an estimated 99%.

Such an upheaval has never been attempted in crypto before, let alone on Ethereum, home to about 3,500 active decentralised apps, ranging from exchanges to games and handling billions of dollars' worth of crypto. In the works for years, the Merge doesn't change the end-user experience on Ethereum, but it's a key stepping stone to more upgrades that will make the network faster and cheaper, and should further increase its stature and usage.

"This is the first step in Ethereum's big journey towards being a very mature system," Buterin said during an online Merge viewing party, essentially a public video call where developers tracked live progress on the switch. "And there's steps left to go. We still have to scale. We have to fix privacy. To me, the Merge symbolises the difference between an early stage Ethereum and the Ethereum we've always wanted."

As it became clear the transition had worked, developers who had worked on the project for months started congratulating each other on the call. Watched by more than 41,000 people at peak, the viewing party featured content ranging from dry technical explanations of what the Merge would entail, to the performance of a Merge-themed song. Lyrics included: "Carbon footprint is all gone. That's why we are singing the Merge song."

Ethereum Finishes Long-Awaited Energy-Saving 'Merge' Upgrade_1

The Merge also changed properties of Ether, making it more akin to yield-bearing securities. Staked Ether will generate a return, expected to be around 5.2% after the Merge, according to tracker Staking Rewards. Coupled with an expected net decrease in Ether token supply soon after the update, that should make the coin more attractive to investors.

Ether was up as much as 3% following the merge to US$1,654 (RM7,500.89). The token surged more than fivefold in 2021, outperforming bitcoin by a wide margin, in part on optimism about the Merge. Both cryptocurrencies have struggled since hitting record highs in November, with Ether down more than 50% this year.

The software upgrade is called the Merge because the existing Ethereum blockchain will combine with a parallel network that's been running for almost two years to test the proof-of-stake concept. Overall, the upgrade has been under consideration for over seven years.

Even though completed, the Merge could be followed by days or even weeks of hiccups, based on what happened after some prior Ethereum software updates. Worried about bugs and hacks, crypto exchanges like Coinbase Global Inc paused Ethereum-related withdrawals and deposits around the time of the software upgrade. Crypto lender Aave had suspended Ether borrowing in advance of the Merge.

Adding to the concern is the likely creation of copies of Ethereum that still use power-hungry computers called miners. These forks, such as Ethereum POW, create their own copies of Ether coins given to all holders of mainstream Ether. The tokens may have some value. But the existence of several versions of Ether — each running on a different chain — could create confusion and give rise to attacks and scams. So can copies of other tokens running on forked chains.

While all apps and wallets currently on Ethereum have been replicated on the forked chains, most apps are likely to be broken, as key players — USDC stablecoin issuer Circle and oracle provider Chainlink among them — have said they won't support the forked versions. Whether the forked chains can stay viable in the long run remains to be seen.

Large teams of Ethereum developers from all over the world have worked on the Merge for years. In late 2020, they debuted Beacon Chain, a parallel network that was testing the ordering transactions via staked coins, or a system called proof of stake. In the Merge, Beacon was merged with the main Ethereum network, using miners, and made Beacon Ethereum's way of testing the ordering of network transactions.

Source: Bloomberg

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Kevin Du

A long-awaited software upgrade to the Ethereum blockchain aimed at slashing its huge energy consumption is under way, a move proponents say may widen the technology's use and support the price of the Ether token.

The upgrade, known as the "Merge," will mark a radical change in how transactions on the Ethereum blockchain occur and Ether tokens are created.

The new system will consume 99.95 per cent less energy, said the Ethereum Foundation, a body which acts as a representative for the network.

When will the Merge happen?

The Merge has already started. The Ethereum Foundation initially said it would take place between September 10 and 20 and it has since updated that to September 14/15.

"The precise timing depends upon how the network hash rate develops and it can be monitored at bordel.wtf. The Merge will be triggered when the network passes a threshold accumulated difficulty, known as the TTD (terminal total difficulty)," the foundation said.

What does the Merge entail?

If successful, Ethereum will move from a "proof-of-work" system — in which energy-hungry computers validate transactions by solving complex mathematical problems — to a "proof-of-stake" protocol. This involves people and companies acting as validators and using their Ether as collateral, in an attempt to win fresh tokens.

Ether is the second-largest cryptocurrency after Bitcoin with a market capitalisation of about $200 billion, data site CoinGecko said. There are about one million to 1.5 million transactions a day on the Ethereum blockchain, compared with Bitcoin's 200,000 to 300,000, CoinMetrics data showed.

Cryptocurrency prices plunged earlier this year as a broader downturn in financial markets prompted investors to ditch risky assets. Ether has risen by about 80 per cent since a mid-June low, while Bitcoin has had little change.

"This is a very material development in the overall evolution plan for Ethereum," said James Malcolm, head of FX strategy at UBS.

Energy-saving step forward …

The high energy use of cryptocurrency and blockchain technology has drawn criticism from some investors and environmentalists.

A single transaction on Ethereum currently requires as much power as an average US household uses in a week, researcher Digiconomist said.

To proponents, the energy-saving upgrade represents a major step forward in the race to become the world's top blockchain.

"The energy expenditure of Ethereum will be roughly equal to the cost of running a modest laptop for each node on the network," the Ethereum Foundation said.

Ethereum has become the blockchain of choice for various functions in the world of decentralised finance, including smart contracts and projects involving tokens representing traditional assets such as stocks and bonds.

Ethereum backers say the technology will form the basis of a new financial system, in which money and assets can be traded in the form of cryptocurrency tokens without the need for providers of traditional financial services.

Others see it as a cornerstone of Web3, a hyped but still unrealised iteration of the internet where blockchain and cryptocurrency assets take centre stage.

Still, Ether has, so far, had limited mainstream adoption as a means of payment, with trading by far the most popular use.

Will the Merge reduce gas fees?

No. "The Merge is a change of consensus mechanism, not an expansion of network capacity, and will not result in lower gas fees," the Ethereum Foundation said.

How is the Ether price faring now the Merge is happening?

Ether made modest gains to hover around $1,605 as of 11.21am in Tokyo on Thursday, while Bitcoin edged up to about $20,000.

"The market is pricing in a virtually successful Merge to happen," Teong Hng, co-founder at digital-asset platform Satori Research, said on Bloomberg TV. "For institutional investors, ones who are ESG conscious, they will use this as an opportunity to dip their toes into blockchain, into tokens, into Ethereum."

When Is the Blockchain Upgrade and How Will It Cut Energy Use by 99.9%?_1

The medium- and longer-term Ether outlook is brighter, said Stefan Rust, chief executive of blockchain development house Laguna Labs.

He said Ether could top $3,000 by the end of this year and possibly achieve the so-called "flippening" in time, referring to the idea that its market value might overtake Bitcoin's.

Source: The National News

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Owen Li

Safe to say, investors got ahead of themselves in a desperate attempt to board the peak inflation train early. The collapse on Tuesday – carrying into Wednesday in Asia and Europe – looked quite severe on the face of it but it was simply an unwinding of positions built on the anticipation of a good set of numbers in the days leading up to it.

While the Fed is now almost certain to hike by 75 basis points next week and more in the months that follow than previously anticipated, the view still seems to be that Tuesday was a setback rather than a game changer. Confidence that we are at or near peak inflation is dented but not broken and this week serves as a reminder that as was the case on the way up, the path back to 2% will likely be littered with nasty surprises.

RBA will likely welcome labour market report

This will likely be the case for most central banks, not just the Fed, with the RBA seen to be in the early stages of its pivot towards slower tightening. After hiking rates by 50bps, markets are now pricing in a 25bps hike next month although as we've seen so often this year, that could quickly change with the data. The labour market figures today could support such a move, as employment rose a little less than expected while participation also rose, unexpectedly lifting the unemployment rate to 3.5%. The Aussie dollar rose after the release but has since given the bulk of that back.

PBOC leaves MLF unchanged and supports CNY

The PBOC's battle to support the yuan continued on Thursday as it left the 1-year MLF rate unchanged at 2.75% and set a stronger fix on the currency. The result was around 200 billion yuan being withdrawn from the banking system, with the central bank stating that it would "keep banking system liquidity reasonably ample". The dual threat of a slowing economy and tumbling currency against the dollar is posing quite the challenge for the central bank which is continuing to try and push back against both, with limited success.

Yen steady amid intervention warnings

The yen remains a key focus after a slew of intervention commentary yesterday which accompanied reports of a rate check by the BoJ. While officials have been keen to state that no warning of intervention will be forthcoming, nor perhaps even confirmation of it, the line in the sand around 145 against the dollar appears to have been drawn. The message was loud and clear and now it's just a case of whether markets will respect it. That's not always the case and we could see its resolve tested after 24 years without such action.

Oil steady after inventory data

Oil prices have steadied a little after rebounding strongly this past week. There are many forces dictating the price action in oil markets right now, with economic uncertainty right up there alongside a potentially unpredictable OPEC+. The stronger dollar is potentially another headwind, with the rally losing steam earlier this week as the greenback surged in the aftermath of the inflation release.

The inventory data on Wednesday didn't cause much of a wobble despite surpassing forecasts with a 2.442 million barrel build against expectations of something far more modest. Of course, this was still much smaller than what the API number indicated a day earlier so perhaps that limited the surprise factor.

Has the damage been done?

Gold is still hurting after the inflation data on Tuesday. It was just starting to find its feet again ahead of the data and the report delivered a crushing blow. The yellow metal is off around four-tenths of one percent this morning and comfortably below $1,700. The key level though is $1,680 and a significant break of this could be painful, with it having been a floor over the last couple of years. We could then see some support around $1,660 but at that point, the damage will have been done.

Will it be a "sell the fact" event?

Bitcoin has stabilised once more around $20,000 after Tuesday's bruising encounter with the US inflation data. As we saw elsewhere, the cryptocurrency had rallied in anticipation of something more favourable but it wasn't to be. With that now behind us, the question will become how the crypto space reacts to the Ethereum Merge. It's been a long time in the making and the question on traders' lips right now is will it be the next bullish catalyst for cryptos or a "sell the fact" event.

Source: MarketPulse

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Damon

Responding to rising eurozone inflation, the European Central Bank has designed (ECB) a new policy tool. Innocuously called the Transmission Protection Instrument (TPI), it is supposed to enhance the ECB's ability to intervene when a widening disparity in borrowing costs between the eurozone's most stable and most indebted countries threatens a fragmentation of the euro system.

The instrument is, in essence, a bond-buying scheme targeted to aid individual countries that the central bank deems at risk. This has advantages. However, by introducing TPI, the ECB is violating a fundamental principle of the European Monetary Union and may end up stoking up inflation rather than dousing it.

The reckoning

It took the ECB a year to acknowledge that the current high inflation is not just a "transitory" episode. For months, the institution tirelessly repeated that inflation would return by itself to the 2 percent target and even fall below it, once the problems of pandemic-related supply-chain bottlenecks and war-related energy shortages are sorted out.

However, euro area inflation keeps climbing, breaking record after record and plunging Europeans into the worst cost-of-living crisis in a generation. Meanwhile, annual inflation rates are creeping toward double digits and show no sign of peaking.

The ECB has had no choice but to follow the lead of other major central banks, such as the United States Federal Reserve (Fed) and the Bank of England, which started on the path of monetary policy normalization months earlier.

ECB's hawkish talk

On July 21, 2022, for the first time in 11 years, the ECB announced it would raise its key interest rates by 50 basis points (0.5 percent) instead of 25 (0.25 percent), as initially indicated. Rates were increased once again on September 8, this time by an unprecedented 75 basis points. Further hikes can be expected in the coming months.

Even dovish central bankers now say it was high time to take rates out of the negative territory in which they had been stuck since mid-2014. The negative rate policy, long celebrated as an anti-crisis wonder weapon, is increasingly seen as a monetary aberration that did more harm than good to the eurozone's economy.

ECB policymakers have started to acknowledge their failure to predict the upsurge of post-pandemic inflation, even though they contributed to its cause. To rebuild their credibility, they recently decided to break free from "forward guidance." This monetary policy tool, introduced in 2013 by then-ECB President Mario Draghi, revealed itself as a straitjacket that, as ECB officials now admit, considerably limits their margin of maneuver if unpredictable situations occur.

The ECB has also adopted an almost hawkish stance by announcing the end of its long-running Asset Purchase Program (APP), launched under Mr. Draghi. In March 2022, the ECB's other massive liquidity injector, the Pandemic Emergency Purchase Program (PEPP), launched two years earlier and scaled up to 1.85 trillion euros during the first year of the pandemic, came to an end, too. Moreover, the terms of the Targeted Longer Term Refinancing Operations (TLTRO) recently changed, making them less attractive for banks and leading to more credit-tightening in the eurozone.

Cheap money policy is not over

Slowly but surely, the process of normalizing the ECB's monetary policy stance seems to have started. Does this imply that the era of cheap credit is over in Europe?

Not really. Net asset purchases under APP and PEPP may have ended, but reinvestment of these bonds will go on when they reach maturity. At the end of August 2022, the stock of Eurosystem bonds stood at 3.436 trillion euros. That is still plenty of money to keep monetary policy ultra-loose for a long time.

More importantly, for the reinvestment of PEPP proceeds (which will continue until the end of 2024 at least), the ECB is not bound by capital keys. In a press conference last December, ECB President Christine Lagarde suggested that "under stressed conditions," her institution can freely decide when, where and how to reinvest the colossal treasure of government bonds it owns.

"Flexibility" has become the new magic word, which allows the ECB to continue to cap spreads on the debt of certain, well-chosen eurozone sovereigns. Greece, Italy, Spain and Portugal could be in the lot.

This flexibility opens the door to a two-speed monetary policy. For member states that perform well and control their debt, the monetary policy screw will be tightened, whereas, for those that spend beyond their means, the money tap will remain open.

Put differently, those who play by the rules are punished, while those who do not are rewarded. This positive discrimination could exacerbate tensions between peripheral and core eurozone nations.

There is a reason why, two decades ago, the EMU architects insisted so much that all eurozone countries play by the same rules and be treated in the same way. Monetary policy should not deal with regional differences, it was stated. Rather, it should be applied to the eurozone as a whole. The ECB is breaking with one of the EMU's core principles by introducing regional differences.

Containing bond market stress

The ECB's biggest fear is that over-indebted sovereigns will end up facing exorbitant borrowing costs. That can happen when bondholders lose trust in a government's ability to pay back its debt. When, as a result, a massive bond sell-off occurs, bond prices fall, and yields shoot up. The concerned government finds itself under even more pressure.

In the past decade, there were several occasions when the eurozone saw that investors' fears could become self-fulfilling. One such episode led to the multiyear European sovereign debt crisis almost bringing down the euro in 2012.

Another happened on March 12, 2020, the day after the World Health Organization declared Covid-19 a pandemic. President Lagarde had sent European sovereign debt markets reeling back then with the words: "We are not here to close spreads. This is not the mission of the ECB." Ms. Lagarde was referring to the suddenly widening gap between Italian and German 10-year government bond yields – a closely watched gauge of investor confidence.

During the Covid-19 outbreak, Italy's debt suffered a rapid sell-off in key European markets. Investors feared that the pandemic could undermine what little was left of the creditworthiness of the already debt-stricken government. In this context, Mrs. Lagarde's remark was interpreted as a refusal of the ECB to stand ready as a lender of last resort to Italy if the worst arrived, which triggered panic.

For many observers, the ECB chief's words augured a breach of the "whatever it takes" commitment to save the euro, famously uttered by her predecessor Mr. Draghi during the eurozone crisis.

In March 2020, what had started as a fire on eurozone bond markets could have turned into an uncontrollable inferno had Ms. Lagarde not rapidly backpedaled and presented her apologies for a "mistake" or, rather, a "communicational blunder," apparently due to fatigue. Markets eventually calmed down, not least because, a week later, the ECB unveiled the most generous stimulus package in its history, the PEPP.

TPI copy and the original

Now the PEPP is gone – at least the net purchases part of it. Yet, the ECB thinks that we could be heading toward situations in which bond reinvestment might not be enough to contain episodes of acute bond market stress.

That is why a new anti-crisis tool, TPI, has recently been designed. It will take the form of a specific bond-buying scheme.

The ECB closely watches the gaps in borrowing costs between the euro area's strongest and weakest countries. In case spreads widen "dangerously," the bank stands ready to buy unlimited amounts of debt of the country whose servicing costs are rising.

Shortly before the TPI was unveiled, President Lagarde declared, "We will not tolerate fragmentation that would impair monetary policy transmission, and we will determine on the basis of circumstances, of countries, how and when that risk is likely to materialize, and we will prevent it."

The TPI is reminiscent of the Outright Monetary Transactions (OMT), created by Mr. Draghi in 2012. Under that emergency program, the ECB agreed to act as a market maker of last resort by buying the debt of a country that is facing exorbitant servicing costs.

However, strict conditions and fiscal responsibility rules were attached to that constraining "macroeconomic adjustment" program, which can be seen as a bailout procedure in all but name. The OMT involves not only the ECB but also the European Financial Stability Facility/European Stability Mechanism (ESFS/ESM) and the International Monetary Fund (IMF). The OMT was never implemented, but it backed Mr. Draghi's famous "whatever it takes" statement.

Moral hazard

President Lagarde wants the TPI to know the same fate. She said she hoped it would never be used. The idea of creating a facility that allows the ECB to act as a buyer of last resort when market liquidity is drying out in sovereign debt markets makes sense. But why create a new one when the OMT is still part of the toolkit?

The answer is that the TPI comes with much looser conditions than the OMT. Virtually every eurozone government is eligible for the TPI. That could be advantageous. For instance, rapid action and intervention flexibility can reduce situations of acute sovereign risk.

The downside is that it encourages fiscally fragile governments to continue on the path of excessive debt without engaging in structural reforms.

Facts & figures

The OMT's eligibility conditions are strict

A necessary condition for OMT is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) program.

Such programs can take the form of a full EFSF/ESM macroeconomic adjustment program or a precautionary program (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases.

The involvement of the [International Monetary Fund] shall also be sought for the design of the country-specific conditionality and the monitoring of such a program."

TPI conditions are easily fudged

The TPI's eligibility requirements do not mention the IMF or the need for conformity with an appropriate EFSF/ESM program. It has only three main criteria, pointed out Willem H. Buiter, a former member of the Bank of England's Monetary Policy Committee in a comment titled, "Will Europe's New TPI be an ATM?"

The member-state government must be in compliance with the EU fiscal framework, meaning that it is not subject to an excessive-deficit procedure and has not failed to take effective action in response to an EU Council recommendation.

The government must exhibit an absence of severe macroeconomic imbalances, meaning that it is not subject to an excessive-imbalance procedure and has not failed to act on an EU Council recommendation.

And it must demonstrate fiscal sustainability, based on debt-sustainability analyses by the European Commission, the ESM, and the IMF, among others.

"The problem with these conditions is that they are easily fudged," cautioned Mr. Buiter. His conclusion: "[F]iscally fragile eurozone governments have been reluctant to submit to the OMT's eligibility conditions. The TPI offers superior financial support with minimal conditionality. Guess which one will prevail."

In the end, it does not even matter whether the TPI is used or not. The fact that it is there, backed by the ECB's promise to be the buyer of last resort, is enough to create bad-debt incentives. Worse, it can lead reckless governments to put the ECB under pressure simply by taking on unsustainable debt.

In short, the TPI can come at the cost of fiscal capture. Ultimately, the ECB's independence is at stake. Italy may be the first test case for the TPI. The country's future looks deeply uncertain after Prime Minister Draghi's government collapsed in July 2022. Since February 2021, the man who once "saved the euro" and put an end to Europe's worst sovereign debt crisis incarnated trust in Italy's capacity (and willingness) to find ways to pay back its 2.75 trillion euros debt pile.

Now that he is gone, Italy's creditworthiness could be over the cliff sometime down the line, notably if some post-fascist/populist party gains power. Allowing an irresponsible government to pursue reckless fiscal policies would also end up crippling the credibility of the ECB. If the TPI was about preventing sovereign debt crises, it could fall short. Creating incentives for governments to fiscally misbehave inadvertently produces new conditions for a sovereign debt crisis.

Scenarios

Eroding the euro

There may be a case for using QE tools in ultra-low inflationary or deflationary contexts, which was the situation over the past decade. But in the current environment of high and persistent inflation, introducing a new net bond-buying scheme that comes on top of flexible (or, rather, discretionary) bond reinvestment to support ailing eurozone governments adds fuel to the fire, as such policies are inherently inflationary.

Over the past 10 years, the ECB has been criticized for overstepping its price stability mandate. Each time, however, the issue has been discarded or downplayed by the European Court of Justice. It always sided with the ECB.

Now it has become blindingly obvious that the ECB's job has changed along the way. It is more about financing fiscal policy than preserving the euro's purchasing power.

The TPI could become the perfect instrument for ensuring (and at the same time hiding) that incompetent states can pursue the path of public debt.

Watch your wallets

Spanish economist Daniel Lacalle has noted that denouncing this shift in the ECB's mission is not anti-European. It is all the opposite; indeed, pursuing a policy of inflation in a persistent inflationary context is a way to weaken the euro.

The ECB's new toolkit risks undermining what Mr. Lacalle calls "the greatest monetary success of recent history, the euro."

The EMU system was designed precisely to avoid any forms of debt monetization. By law, the ECB is not allowed to directly purchase the debt of governments or directly lend to them. The monetary financing prohibition (or the so-called "no bailout clause") should encourage markets to sanction governments that engage in fiscally insane policies. This pressure was vital to preserve the value of the euro.

Considering that the ECB increasingly breaks with the EMU's core principles, Europeans have reason to worry about their purchasing power.

Source: gisreportsonline

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Winkelmann

The London Metal Exchange faces a struggle to regain its dominant position in global nickel trading as volumes slide and participants flee an increasingly volatile market in the wake of trade mayhem earlier this year.

Nickel volumes on the world's oldest and largest venue for trading metals collapsed after the LME suspended its contract for a week and cancelled all trades on March 8, when prices doubled in a few hours to a record above $100,000 a tonne.

LME data shows many participants have abandoned the nickel market, a trend several traders say looks set to continue leading to even lower volumes and more volatility as more people opt to negotiate prices directly.

Average daily volumes of nickel traded on the LME plunged 50% last month to 203,856 tonnes from the same period last year. This follows drops of 28%, 35%, 25% and 42% in April, May, June and July respectively.

"Volumes may well be down because there is still a certain lack of trust in the LME after the debacle in March," said Wood Mackenzie analyst Andrew Mitchell. "LME nickel does not represent the bulk of the market."

The nickel that can be delivered against the LME's contract will this year amount to only 650,000 tonnes or around 21% of global production compared with 50% in 2012, Macquarie analyst Jim Lennon said.

The exchange says it is working on potential improvements.

"The LME is actively engaging with nickel market users to consider...potential enhancements to its nickel contract and additional measures to address the growing market in nickel and its different forms," the exchange told Reuters in response to a request for comment. "We look forward to sharing plans in due course."

Volatility Doom Loop

Several traders believe the LME's nickel contract will never recover as the low liquidity has created a vicious circle of falling volumes and extreme price volatility.

They say trying to trade even 10-20 lots or 60-120 tonnes of nickel is tough without moving the price, compared with 200-250 lots or 1,200-1,500 tonnes prior to March.

Volatility and rising supplies of Indonesian nickel pig iron (NPI) used to make stainless steel are spurring the shift away from the LME contract. NPI is a low grade cheaper alternative to pure nickel metal.

NPI, which can't be delivered against the LME's contract, is expected to account for more than 50% of global supplies this year at 3.1 million tonnes from 12% in 2010, Mitchell said.

"There is an oversupply of nickel pig iron," said Lennon. "NPI is priced at around $16,500."

LME nickel is around $24,500 a tonne.

NPI is not traded on the Shanghai Futures Exchange either. ShFE offers a nickel metal contract that is highly correlated with the benchmark LME nickel contract.

"The LME contract is imperfect in the context of how the market has evolved. There are different pockets and the LME contract caters for just one of those pockets," said Michael Widmer, an analyst at Bank of America.

Nickel sulphate, used to make the cathode component of electric vehicle batteries is another product. Sulphate can be made from nickel briquettes stored in LME registered warehouses.

But LME nickel stocks are depleted and sulphate is now being made from nickel matte, a product that can be made from nickel pig iron (NPI), and another intermediate product known as mixed hydroxide precipitate (MHP) produced in Indonesia.

Rival exchange CME Group is looking into launching a nickel sulphate contract, according to sources. It declined to comment on how its plans were progressing.

Stainless steel mills, many in China, consume about two-thirds of global nickel supplies. Electric vehicle batteries are expected to take a larger share as sales surge due to the energy transition; around 30% by 2030 compared with 15% last year.

Source: Reuters

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