Maastricht Treaty, ERM2 Fraying?
I’ve recently shown, via the chart below, that the ratio of the DJ Stoxx 600 vs. SPX is nearing 20+ year channel support.
Said support has only been hit one other time, in fall-92.
The relevance of that period is two-fold:
- The Maastricht Treat to create the EU had just been signed earlier that year in Feb-92; it was followed by Denmark voting it down in a Jun-92 referendum and France narrowly supporting it in a Sep vote
- More infamously, in conjunction with the latter referendum votes, Soros began his wager against GBP, ultimately breaking the BofE in Sep-92, forcing a collapse in the currency and the UK’s exit of ERM1
As I always like to say, major fundamental catalysts occur at major technical milestones. Channel support line (2) in the chart above is one such milestone.
And, given the ripples of history, logic would suggest some fundamental catalyst, likely the inverse of the catalyst that occurred the last time the ratio above hit channel support, is apt to occur again as we approach and/or reach that support for the second time in history.
If one pieces together a mosaic of recent world events at the moment they’ll find in it a beautiful picture that dovetails wonderfully with the logic implied by the chart above as follows:
- Greek/IMF leak in front of debt discussions
- Schauble’s bellicosity toward ECB policies
- Netherlands vote down EU-Ukraine partnership deal
- Strangely, a sitting duck Obama with but a few months left meets with Yellen to discuss the economic outlook?
- NIRP as an unequivocal failure, thus exhausting the last pure monetary policy tool for global CBs, paving the way for quasi-fiscal policy to circumvent fiscal authorities
- Bernanke’s imprimatur and rubber stamp on money-drops
- Emergency Fed meetings
And finally, how about the following chart which shows EURDKK inverted (higher = DKK strength vs. EUR) and breaking out from a nearly four-decade trading pattern b/t lines (1) and (2)?
This is the same pattern that has kept Krone strength in check through major recent events such as Draghi’s summer-12 “whatever it takes” declaration and the speculative attack that occurred in Jan-15 on the backs of the ECB launching QE, which then forced the Swiss to abandon the CHF cap vs. EUR, which then focused speculators on the idea that the Danes might have to do the same with the DKK’s peg to EUR.
At the same time that this pattern break-out appears to be at hand, note that the cost of one-year forward EURDKK VOL has settled back down to the general trading range that was in place prior to soaring when the CHF cap was abandoned, a perfect location for a new catalyst to arrive and cause another unexpected spike in VOL.
Something is afoot and it likely involves the fraying of the EU and potentially the EUR/ERM2 at the same time.