History is often a very good guideline when we enter times of extreme volatility in markets and trading. Currently, the plight of the EU Currency the Euro has many gnashing their teeth worldwide. The Euro is making a test of the key 1.20 area versus the U.S. Dollar (see the following chart).
From a technical basis, the Euro certainly could hold this 1.20 level and bounce from here. However from a longer-term historical basis, there really is nothing wrong if it does break down through this level. The Euro was basically "pegged" at a 1-to-1 basis with the Dollar at its creation. Subsequently, it traded in a 0.80 to 1.20 range around the Dollar for several years after -- see the highlighted box below. This is a logical 20% up/down range above the mean, in my view.
In the years since, we have seen a new extended range for the Euro, roughly 1.20 to 1.60. However, a breakdown of this newer range and a re-establishment of the previous range (which may well happen) would not be an abnormal, unexpected type of occurrence. In fact, for those of you who have traveled to Europe from the U.S. during this time, you may agree with me that a sub-1.20 Euro is actually a more "healthy and normal" rate when you look at consumer-type prices.
Euro/USD Monthly Forex Chart
Tag >> currencies
Thesis going forward -
The weak dollar trade is going to come back in vogue soon. Expect the dollar to start declining as the euros take advantage of the fed swap lines (basically, they exchange euros that are worth crap for dollars that are good). The Fed starts the presses up again and prints more dollars, hence deflation of the greenback and re-flation of the eurozone...expect the chinese and others to step
And take advantage of the weaker greenback to scoop up commodities....and there it goes again.
Names - WLT, CLF, ANR, FCX, X, SCHN, VALE, ACI, BTU...probably others but those are the main ones....charts don't look great now but will eventually.
The weak dollar trade is going to come back in vogue soon. Expect the dollar to start declining as the euros take advantage of the fed swap lines (basically, they exchange euros that are worth crap for dollars that are good). The Fed starts the presses up again and prints more dollars, hence deflation of the greenback and re-flation of the eurozone...expect the chinese and others to step
And take advantage of the weaker greenback to scoop up commodities....and there it goes again.
Names - WLT, CLF, ANR, FCX, X, SCHN, VALE, ACI, BTU...probably others but those are the main ones....charts don't look great now but will eventually.
Did the euros panic? I think they did and probably with the help (push?) from our Fed and Government. Look, our recovery is on track (or, it was) and the continued waffling back n' forth between the countries has put fear into all markets. Bailout, no bailout. Small bailout, large bailout. Once this gargantuan number was rolled out Sunday right before trading began in Asia the reaction was as expected. Heck, they are getting ahead of the curve now rather than chasing. If Portugal fails, covered. Spain? Got your back, Spaniards. Markets? Well, a 4% move up after one of the worst weeks in recent memories sends a message to the shorts: Don't mess with reflation.
The key here is avoiding the D word...Deflation. The continued worries over inflation by the Euros were misguided, and much like the defensive posture of our Fed in 2007/08 they needed a bold response: nearly a trillion dollars in 'potential' aid. Why wouldn't they put this out to 'shock' the markets and the world? It's yet to be seen if this response is damaging long term, but there is precedent. Certainly our markets are the model here. To be continued.
The key here is avoiding the D word...Deflation. The continued worries over inflation by the Euros were misguided, and much like the defensive posture of our Fed in 2007/08 they needed a bold response: nearly a trillion dollars in 'potential' aid. Why wouldn't they put this out to 'shock' the markets and the world? It's yet to be seen if this response is damaging long term, but there is precedent. Certainly our markets are the model here. To be continued.
Interesting that both Gold & Oil rose slightly today -- it seems that recently they have been de-coupled for the most part, with Gold rising when the market drops and vice-versa. We will have to see how this plays out in the near-term. Long-term (very long-term), I maintain that the money-printing fiscal policies of the U.S. (and the World) will lead to higher prices for hard commodities relative to currencies.