Stock advice in actual English.
Joined Sep 2, 2009
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The Euro Is Zapping The Rally

Starting right around October and driven by the Fed QE3 announcement, the dollar went into a lovely spiral that culminated in a EUR/USD exchange rate of 1.35. This brought a boon to US equity markets as business picked up, cheap dollars flooded debt markets and foreign capital found it had easier entrance.

However, the sustainability of the trend was always suspect, as witnessed first by Japanese retaliation and now by the reminder that Europe is built on a cracked foundation. EUO is preparing to correct the entire last five months of movement and the US advantage in trade is about to be eliminated. The Fed has once again been checked, this time by foreign currency markets (the last time was by the commodity markets).

Play close attention to the euro here. If it should follow through on the break down that would mark the top of this rally. I have long said that euro parity is an inevitability and with the latest bout of clowning that is being witnessed, I’m guessing that time is drawing nigh. Recall that I also said months ago this rally would be derailed by the EU crisis resuming.

Much of the uptick of economic data was built on those lower currency swaps. While the housing markets subsist on witnessed improvement, the question arises as to how the currency and housing markets are interlocked? The euro can erode the equity run and if the equity run erodes, will that impact homesteading?

The EURUSD thus threatens to create a major disappointment for investors and I see it leading us to the correction I offhandedly guessed at last Fall. The start of Spring is at hand, and it will be déjà vu.

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  1. UnderValuedAssets

    Hello Cain,

    The value of the EURO should actual gain because they aren’t inflating (increasing money supply) nearly to the extent of the other majors (FED, BOJ, BOE). And, as their financial assets continue to deflate, there will be even less Euro’s in existence therefore their value visa via the others will have to go up no? How can it go to parity with the USD when the FED is injecting new money to the tune of 85B per month and the ECB is not? Appreciate ur take!

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    • Mr. Cain Thaler

      Great question. Exchange rates and money in circulation are just one aspect of currencies. Another is “what can I actually buy with this?” Europe is in a large recession and productivity and goods are dropping.

      Also, there are lingering questions about the ability of the EU to hold together, as the individual countries of Europe are heterogeneous and often exhibit antipathy to one another.

      What’s the euro worth if the EU breaks apart? How would it handle any country going back to its old currency, or a new one? What would euro denominated debt be worth?

      Also even though the EU says they aren’t printing, they are. At least artificially. The ECB has stepped in with several trillion euros over the last three years. It was a falshy approach, but it was basically an expansion of the money supply.

      So two major continents in like circumstances that are printing away will eventually devalue the currencies to the extent that they approach one another.

      That’s the idea, anyway.

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