The Lowdown On The Euro’s Relation To The Dollar
Posted: Aug 03 2010 By: Dan Norcini Post Edited: August 3, 2010 at 9:53 pm
Filed under: Trader Dan Norcini
I have received a fair number of emails asking me what is going on with the Euro in relation to the Dollar, especially considering the fact that a mere few weeks ago it was pronounced dead and the European monetary union with it.
What appears to have happened is two-fold:
First, those Euro zone areas that were causing the most trouble, Greece, Spain, Portugal, etc. seem to have been able to sell their bonds, alleviating fears of a sovereign debt meltdown (for now). We all know that a tremendous amount of behind-the-scenes machinations were occurring by the Central Banks and the monetary authorities to insure that the bond sales were not a dismal flop. The repercussions of such would have indeed been earth shattering to say the least.
Secondly, and most importantly, were the comments coming from several US Federal Reserve officials, including Chairman Bernanke, who laid to rest any fears among the hedge fund, hot-money crowd, that the Fed would be tightening monetary policy in any form, fashion or shape anytime soon.
Voila! That was the signal for hot money to pour back into the commodity sector as well as the equity markets. Basically, the Fed has given investors the green light to goose commodities and equities higher and to take the bonds higher as well.
Please note the following chart of the CCI and observe how close it is to making an upside breach of a critical technical resistance level. In regular speak, this translates to a shift by market participants in favor of inflation and away from deflation. We could very well be on the cusp of a Federal Reserve-induced commodity buying binge once again as the Fed works feverishly to avoid deflation.
They should be careful what they wish for.
Lastly, the language coming from the Fed has essentially guaranteed low interest rates for the foreseeable future which totally takes the props out from underneath the US Dollar. That is why it is getting sold off. What investors are looking at is a global economy which is basically two-tiered. One tier is the West, particularly the US which remains mired in a sluggish growth environment saddled with an extreme level of government debt (Japan for all practical purposes should be included in this category). The other tier is the emerging markets of Asia and to a certain extent, portions of South America. Capital flows will move towards the latter and away from the former which removes an important floor of support beneath the Dollar. The Euro is gaining on the Dollar in more of an aversion to the low interest rate environment guaranteed by the Fed.
The Dollar is extremely oversold and could pop higher almost any time but barring any further dire news out of the Eurozone, it is most likely that its rallies will be short-lived.