Where to now for EURO/USD ?

[TRL]

In my last posting on Dec 10 th, I pointed out that EURO/USD seemed to be following a similar chart pattern to early 2004. This would require a "brief new high" above 1.3500 before a tradeable top was in place. The top came in at 1.3670 and it has been all downhill since then. I am now projection a move down to the 1.2950/1.2830 range before new long postions can safely be established for a resumption of the uptrend to 1.4500. For updates and supporting charts , check out the web site shown in my 'Profile'.

Max McKegg
TRL

[jtb790]

Originally posted by TRL
In my last posting on Dec 10 th, I pointed out that EURO/USD seemed to be following a similar chart pattern to early 2004. This would require a "brief new high" above 1.3500 before a tradeable top was in place. The top came in at 1.3670 and it has been all downhill since then. I am now projection a move down to the 1.2950/1.2830 range before new long postions can safely be established for a resumption of the uptrend to 1.4500. For updates and supporting charts , check out the web site shown in my 'Profile'.

Max McKegg
TRL

Max, is this your own analysis?

Because most the world thinks the euro will climb to 1.45 too.

Personally I think you are right about the continued downswing, but after that I think it may TRY to climb to 1.45, but fizzle out and drop. Much much later on... who knows, it may.

Or, it may drop to under $1.00.

I think for the Eurozone not to become little more than a paperweight the rate needs to trade (at least) in the 1.1500s for awhile before going to "1.45."

I like your flag!

Gamal Saham Ruach

[novice]

Originally posted by TRL
I am now projection a move down to the 1.2950/1.2830 range before new long postions can safely be established for a resumption of the uptrend to 1.4500.

A pullback to just below 1.3000 (1.2850-1.2900 ?) and then a resumption of the long term up trend seems about right.

The 600 point fall in the EUR/USD (and similar falls in other markets e.g. XAU/USD) seems to be mainly the result of EUR/USD bulls covering their long position (i.e. buy as the market rises (and it was a BIG, LONG rises and hence there was a lot of longs) , place sell stop losses just below the market, the market falls a bit triggering sell orders causing the market to fall further triggering further sell stop orders and so on).

But the long term trend seems to be still clearly up.

Weekly EMA's are still rising, prices were WELL above these rising EMA's, now prices have pullback to these rising EMA's, from here prices should bounce off these EMA's and go again.

Also the US Dollar fundamentals have improved little. Yes US interest rates have rising a little, but enough to offset the trade deficit, current account deficit, budget deficit, federal debt, geo-political risk, The growth of M1, M2 and M3, Greenspan and Beneke's (sp?) promise to deliver "helicopter money"?.

The Euro does not have much better fundamentals, but they are a little better trade surplus for example. But to me it seems that the market looks at things the USD vs everything else (e.g. Euro, Yen, gold, oil, etc) with most (almost all?) of the focus on the USD and little on the everything else. Basically if the USD is weak everything else is strong almost regardless of the merits of what ever the everything else may be.

The old highs (from early 2004) around 1.3000 should provide enough support to halt the current downswing, especially since most of the longs will have covered their positions and thus no longer selling.

[Gamma_Jammer]

Hmmm - I think we're at a turning point here.

Key things for me have to be the stance of the Fed in the next couple of months and the impact of the greenback on equities. The latter is the really interesting one imho. I heard vague talk of boeing winning a big order from europe (lufthansa maybe) at the expense of airbus, largely apparently as a result of very competitive pricing in dollars. If this is true, and the phenomenon spreads, surely this will ultimatly start to impact the trade gap. Of course that would in turn lead to gradual dollar appreciation, taking the shine off the stellar price of a jumbo jet ever so slightly.

Guess that's why it's an endlessly fascinating game.

[novice]

Originally posted by Gamma_Jammer
I heard vague talk of boeing winning a big order from europe (lufthansa maybe) at the expense of airbus, largely apparently as a result of very competitive pricing in dollars. If this is true, and the phenomenon spreads, surely this will ultimatly start to impact the trade gap. Of course that would in turn lead to gradual dollar appreciation, taking the shine off the stellar price of a jumbo jet ever so slightly.

Jim Puplava of http://www.financialsense.com has an interesting position in regards to the falling US Dollar fixing the trade deficit. He thinks the deficit is structural and a falling US Dollar will do little help. By that he means that the US is now largely a service economy. While it largely depends on imports for its manufactured products (e.g. cars, consumer goods etc) and primary products (e.g. crude oil). He thinks that even if the US Dollar falls it will not be able to export in a large quantity because service jobs are largely tied to a particular location (he jokes that if the US Dollar falls is the US going to export wedding planners to the world). While even if their price rises the US will still need to import the products that it does not produce. Thus a falling US Dollar will not have the textbook effect of reducing the trade deficit. In fact because imports are now more expensive and these products can't be substituted with domestic goods because of the structure of the economy the trade deficit may get worse.

Australia has much the same structural deficits (i.e. a service economy with little manufacturing base, but still some significant primary production). Basically relative cheap per unit exports (e.g. coal, wheat etc) does not balance the expensive imports of manufactured goods (e.g. cars, furniture etc) the service sector (e.g. home building (the great "Australian dream"), financial etc are largley internal (i.e. with the Australian economy).


http://www.financialsense.com/Market/puplava/2005/0103.html

" ..............

As far as U.S. competitiveness, what will another 10% devaluation of the dollar do for the U.S. manufacturing sector that 30% devaluation has not already done? The last time I checked, the U.S. trade deficit was getting bigger not smaller despite a decline in the dollar.

................

Wishful Thinking

As to all of the wishful thinking regarding a lower dollar as a panacea for what ails the U.S. economy, think twice before you are culled into such wishful complacency. The U.S. trade deficit is structural. Most of what the US imports is because we don’t make it here anymore. As you recently went Christmas shopping, what did you find in the stores that are manufactured here? Were the shelves at Wal-Mart stocked with U.S. made goods? Were the racks at Nordstroms or Macy’s hung with U.S. made clothing? Were the aisles at Best Buy and Circuit City full of U.S.-made electronics? Consumer spending makes up over 70% of the U.S. economy. Today most of the goods the consumer buys are made overseas. Another 10% devaluation of the U.S. dollar isn’t going to solve that problem.

In addition to retail outlets stocked with foreign made goods, another factor contributing to the U.S. trade imbalance is America’s voracious appetite for energy. Most of that energy (60%) comes from overseas from the Middle East, Russia and South America to natural gas from Canada. A 10% decline in the dollar will not solve America’s energy needs. Dollar devaluation will not cause oil production to increase in the lower 48 states or in the Gulf of Mexico. The problem is depletion, which continues regardless of what happens to the dollar or what goes on in Washington and Wall Street. For the U.S. must now compete with Asia for oil and soon natural gas. Asian consumption has now become the single most important factor in energy demand. It shows no sign of decreasing nor has energy demand slackened in the U.S. As to the benign effects of lower oil prices stimulating the stock market and the economy this year, any declines will only be a temporary respite from a decade long climb to $100 oil.

Far from bringing beneficial effects, a falling dollar has strong inflationary implications. If the dollar declines further, raw material costs will rise and along with it inflation. Pipeline pressure is increasing with producer prices trending higher. Businesses in the U.S. are becoming confident enough to start raising prices from consumer goods companies to food processors. A falling dollar is a two-edged sword with more negatives than positives."

In this audio interview (I think about half way through?) he explains why a fall dollar will do little to help the trade deficit becuase of the structure of the economy.

The 30 minute mark is where he talks about the US Dollar and the trade deficit

http://www.financialsense.com/Experts/2005/Turk_Rubino.html

The one exception he does bring up is the manufacture of airplanes.

[FXLearning]

I think that many of the imports from the US (not counting luxury items) are low value items, for instance, toys and clothes.

However, I would argue (with no data at the moment at hand) that many of the items exported from the US are high value items, for instance, planes, know how technology, and medical technology

I would also think that as China floats the Yuan the 30% of the trade balance related to China should move slowy in favor of the US. I read somewhere that China in order to belong to the WTO (I hope I got this one right) needs to readjust its currency by 2007. However, most experts think it will begin to do a gradual currency adjustment rather than to wait until the last moment.

This should help to decrease the overall US trade balance more favorably for the US.

In addition, sometime in 2006 -2007 I would expect a lower level of government spending to decrease the governments need for current levels of external financing.

In addition, as interest rates continue to increase this year in the US spending should go down in the US. This should decrease the import component of the trade balance.

Higher interest rates should also increase the demand for US securities that pay interest which in turn will increase demand for US dollars.

So overall, I would expect that in about two years from now imports will go down, exports will go up, consumption will decrease, savings will increase, unemployment will go up, private investment will stay the same or go down, government spending will decrease, interest rates will increase, the stock market will go down, and the US dollar will start to get stronger.

[jtb790]

Very good analysis and deeper thinking by all posters here!

Keep up the good work!

Coinz

[novice]

http://www.financialsense.com/editorials/schmidt/2005/0109.html

"Some strength in the U.S. dollar was expected. A new year after a currency has been exceptionally strong or weak usually results in a sharp reversal. Not expected was that so many players would join in to buy dollar. For example, central banks alone bought $8 billion of U.S. debt last week. That annualizes to about a $400+, which is fairly strong support. Difference between intervention and manipulation is in the eye of the beholder. Clearly some momentum funds also decided to play. Action in Gold in most of last week was exacerbated by this combination.

The new year, however, brought no change in the fundamental situation for the dollar. Traders and central bankers can act, but the outflow of dollars still dominate. Fundamental flaws in the U.S. economy will not turn the dollar back to a strong money. Friday's employment report confirms that. 2.2 million jobs created last year. Of that, 76,000 were in jobs making something. The rest are paper shufflers, internet surfers and in the housing bubble. Such is not an economy that supports a global reserve currency. U.S. dollar's bear market has not ended, just paused."

If the buying of the US Dollar was largely by:
USD bears covering short positions
Central banks trying to prop up a weak currency (if it was not weak why would they need to buy it to give it support?)
Short term momentum traders

It does not seem that anything long term has changed (i.e. no significant new long term US Dollar buying).