Saturday, January 8, 2011

eur-usd trade theme 2011 - Eurozone Fundamentals vs USD Fundamentals

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US dollar - Eurozone trade theme for 2011

A carry trade is a trade when an investor sells a currency with low interest rates for a currency with a higher interest rate (example carry currency = .5 % vs currency with higher rate like 4.5%) . In the case of the eur-usd currency pair (1.0 vs .25 benchmark rates) the investor would want to be long in the euro especially when there are more risk takers in the market because the borrowing currency will be the one with the lower interest rate.

It seems to make sense that if equities are going up the usd will be going down do to it's near zero interest rate policy. It won't matter if it's the US, Asian, or European stock markets that are going up because the higher interest rate currency will be the beneficiary over the lower yielding currency (or the currency being borrowed from).

As long as the central bankers of the US and Euro are keeping the same tone this strategy usually works very well. So the idea is to go long eur-usd everytime stock indices are beginning a new uptrend and inversely sell short when stock indices are entering a downtrend.

Since there is no confirmed exit strategy for the US the greenback remains the carry currency of the Eurozone, Aussie, Kiwi, Loonie, the British Pound and so on. This is because most countries have a stronger central bank rate policy than the US, higher rates, and their outlook seems to be more serious towards fighting inflation.

The reason for this weak policy is because the US is what is known as a debtor nation. A nation with a cumulative balance of payments deficit. A debtor nation has negative net investment after recording all of the financial transactions it has completed worldwide.

Although the Eurozone has had it's issues, nevertheless, the ECB has had a stronger currency policy than the FRB headed by Bernakee and Company. Coupled with weak dollar policy, huge seemingly insurmountable deficits, and poor resources the US dollar has been a favorable short through much of 2110 and perhaps beyond.

US Debt Statistics

What are words without some stats to back it up? Here are some links:

US National Deficit

Who owns the public debt?

National Government Debt Clocks & Savings Clocks

While debt alone doesn't determine the value of a currency it does effect what options currency policy makers can set and indirectly effects the value of the currency. On one token more supply (lower rates - injections from stimulus) is needed to stimulate the economy but on the other too much has other effects like inflation and with stimulus and borrowing comes debt.

Policy Reflected By Egos of Americans

While many think the government and it's policies are to blame another finger to point is the ego of Americans have about themselves. Throughout the world many people have to struggle with less to get by while Americans believe they don't have to work as hard to have things. Meanwhile jobs are sent over seas and Americans just keep digging into their credit and deficits. Another reason to go long eur-usd although they have their own debt woes and similar problems.

But never mind hard working Americans - it goes much deeper than that. A much worse epidemic is the amount of resources Americans consume. No matter how hard Americans work "we" (I'm American) will never be able to compensate for the amount of oil this country consumes. This situation can only end tragically at this rate which will most likely equate to hyperinflation, high commodity prices, and a struggling economy do to the situation. All of which we are experiencing but the situation could get worse because nothing has really changed.

The United States was once the land of great opportunity throughout many eras such as the roaring 20's and the end of the great world war which she lead an epic victory over the nazis but in my opinion lived much too long off of reputation alone of the pre-50's. The youth today is not like the youth that had to stand in food lines of the great depression and fight against a mighty war machine. The youth back before the 50's knew what it was to fight for something very meaningful and understood what it meant to really work. Not only is the new age American youth lazy but our society and workforce are aging. Schools are filled with gangs and misfits that don't have any society skills. The US has the highest prison population on earth and consumes the most drugs of any industrial nation.

The society is literally dieing. Even the roads and other infrastructure is falling apart while other growing societies are laying down new roads and new industrial complexes.

US dollar parity

The USD dollar has flirted with parity many times against currencies it once held a distinct advantage over. USD-CAD and AUD-CAD have breached this mark several times but have had trouble holding it. This means the US has indeed lost it's once dominant position over these nations which have literally outgrown the US in many ways especially in trade policy and trade relations.

The aud-usd flirted with parity back in 2008 but the aussie proved not to be ready back then and it led to a major fall. Maybe parity is not the goal of all nations vs the USD but it is an inevitable reality with the great trade deficits that exist with America losing it's prominence. 2011 will answer that question if the US decoupling is being fulfilled as many economist have predicted and parity is not just tested but reversed to favor other nations that were very low on the totem pole compared to the great land of opportunity prior to the US housing collapse or some call this period "The Great Recession".

I personally see it as a depression that was never declared. Why Depression? Simple reason is the situation with jobs, debts owed, and the amount of banks that have went under. That is not a recession when that many banks go under - it's' a depression. In 1929 they had an excuse - it was all new. The roaring 20's and expansion of the US in the industrial age was all new. In this one history repeats itself but it was over the housing bubble. What a sick excuse for incompetent leaders that never stepped in to curtail the situation and knowing full well that that much leverage and debt ends disastrously.

Eurozone crisis compared to US crisis

We can only guess if Eurozone problems with deficit will be as bad as the current US ordeal. But as long as the stock markets are being supported by US central banks policy and addiction to "cheap" foreign oil we keep gobbling up at any price it will just be another opportunity for eur-usd long positions.

But wait there's Greece, Ireland, Italy, Portugal, and Spain to drag down the Euro. One can call this an Ugly Pagent as the Eurozone has done it's fair share of bailing out of it's pig states in comparison to the Fed's printing press team headed by Bernankee. It is in fact one ugly mess but one will rise above the other - it just won't be pretty.

Eurozone Greece Crisis

Back in December 2009 Greece problems began emerging and the eur-usd began it's collapse from the 150.00 area. Then in May 2010 Europe announced the bailout of $1 Trillion and the Euro momentarily recovered in June from a massive downtrend (at least until new issues emerged such as Ireland).

    “Every other alternative is much worse and much more dangerous, so we have to do this,”

       Finance Minister Wolfgang Schaeuble

Much like the US's aging population Europe's "pig states" like Greece have an aging population that relies on welfare and credit while unemployment is soaring. It is not a good situation which adds up to a huge deficit which other Eurozone members are not too fond of especially since their GDP (gross domestic product) does not even come close to their deficits.

Much like the US doesn't have a clear exit strategy from near zero interest rates, Greece does not have a concrete solution to their debts other than being bailed out by the rest of the European Union. In fact if Greece was not bailed out it would most likely had to default on some of it's debt which would have meant it's removal from the EU.

It's not just alot of debt for the Eurozone. In fact the Greece debt is one of the highest in the world relative to it's GDP and has even exceeded 100% of it's GDP at times like back in January of 2010 when public debt was nearly an astounding 120% of Greece's GDP and effectively earning #1 ranking pig state in the EU.

A very European crisis

Despite protests, Greek Socialists win budget vote

UK budget deficit 'to surpass Greece's as worst in EU'

Primer: Europe's dire debt crisis

Eurozone Problems Continue With Ireland's Debt Crisis

As if the Greece financial crisis wasn't enough for the EU, to make matters worse, Ireland also is a high risk to Eurozone stability, with high debt and deficit issues. Prior to the Ireland problem the Euro had been in "recovery mode" from the $1 trillion dollar bailout that sent the Euro flying. But in November 2010 when Ireland issues surface it sends the eur-usd back down again from the 140.00 area into another rapid downtrend.

debt crisis threatens to destroy euro

As long as Eurozone countries are a threat to default because of deficit the Euro is still a risk. Instead of trying to ride the US economic outlook for it's own prosperity, Eurozone and it's members have to take responsibility for it's own debt problems. And as long as the US has no exit strategy the US economic outlook will be on hold and the Eurozone is the hostage. It's a complicated race but an important one because as we forex traders know the eur-usd currency cross is what basically sets the value of the US dollar because of the weight the Euro has on the dollar or those in the know call the "anti-dollar".

Of 6 currencies that determine the value of the dollar the euro comprises 57.6% of the value of the US dollar and the 2nd is the Japanese Yen at 13.6%, UK Pound 11.9%, Canadian Dollar 9.1%, Swedish Krona 4.2%, and the Swiss Franc 3.6% . So as far as importance goes, EuroZone valuation is more than 4x important than Japan when valuing the USD.

Yes a complicated and important race.
It's also a race that the Federal Reserve Bank of the US isn't trying to win.

eur-usd updates

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