Economy

[mwagee]

If it is useful to you guys, I can provide some weekly EURUSD charts and some basic technical analysis to show where the euro is likely headed. I actually specialise in the GBPUSD pair, but the EURUSD pair is correlated enough that I should be able to do a pretty decent job at least.

What do you do for a living by the way?

[magic-belgium]

As long as the oil's price is going down, $ will go up against the Euro.

€ is going up against the Y at the moment...

[mwagee]

As long as the oil's price is going down, $ will go up against the Euro.

€ is going up against the Y at the moment...

I think the relationship goes something like this: intrinsically, the dollar is not that strong. But relatively speaking since everyone is ponying up money to guarantee their banking system, our 750B bailout+ FNM+FRE+AIG guarantees has been out of the limelight. Also, people are unwinding debt that is denominated in the US Dollar and as such demand for the currency has gone up relative to other currencies. This is why the dollar has appreciated so much in the last couple of weeks.

The price of a barrel of crude is denominated in the dollar so as the dollar strengthens, naturally the value of crude goes down. The other piece of oil price is demand destruction which is happening as manufacturers are cutting back production etc etc.

Yen is also strengthening because people are unwinding Yen carry trades. Yen interests rates have been near zero for the last decade or so because the g'vt was trying to stimulate growth after their economy crashed. People borrowed the Yen and invested in other assets to earn a higher rate of return. Now that the world is deleveraging all their bets, theres been a huge demand for Yen as well.

[ouallada]

If it is useful to you guys, I can provide some weekly EURUSD charts and some basic technical analysis to show where the euro is likely headed. I actually specialise in the GBPUSD pair, but the EURUSD pair is correlated enough that I should be able to do a pretty decent job at least.

What do you do for a living by the way?

I hold a trading portfolio focusing on forex. The huge recent falls in the eurozone currencies have been kind to me.

Anyway, what Mwagee has mentioned about the general state of currencies is pretty much spot on. I'll just add a few general points.

The portion on post-OPEC oil being largely denominated in USD and thus having a high negative correlation leads to the USD influencing oil prices. The intrinsic value of oil can of course also be increased or decreased by certain factors, such as the starting of new oil wells or Middle East unrest respectively. Oil is also used as a hedge against a falling USD, so the opposite now occurs as the USD picks up.

As mentioned, the USD is not supposed to be strong. In fact, a lot of its fundamentals are pretty weak right now. An example is its recent 50 bp interest cut to 1.5%, which should typically exert downward pressure on the dollar in the short run before swinging to an increase in the future. However, the USD has several relatively strong long-term fundamental reasons for increasing.

1) As Mwagee mentioned, unwinding of carry trades (these are done by borrowing from a low interest country like Japan and depositing in a high interest country like Australia, earning the difference barring exchange rate changes) and deleveraging of large investment companies and funds. All this stems from uncertainty and leads to a flight-to-quality. The safest investment in the world? The US T-bill.

2) The USD has already suffered through the subprime crisis. General consensus is that it has already fallen as far as it will go. Attention, on the other hand, is only recently shifting to the eurozone and Asia.

3) The Euro and certain commodities hit record highs against the USD in 2008. Natural market corrections (resistance etc) work together with point (2) to force the Euro and certain commodity prices down. Commodities are also hit by slowing growth in emerging markets, which also fuels a flight-to-quality.

4) Capital investments that were made out of the US are flowing back into the US due to capital costs in the eurozone being affected by the high Euro.

There are other reasons, of course, but I generally take these four to be the strongest overriding reasons.