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Euro
Currency Debut
Despite concern that
Europe’s populations would hesitate over the most massive currency
transition in history, so far new bills and coins are circulating just
fine. Sporadic glitches stem from conversion difficulties, yet
mechanisms in place have removed much of the potential for confusion.
Initially, consumers are allegedly experiencing a slight inflation
resulting from merchants who “round-up” prices that are not evenly
converted from old currency into Euros. However, this effect has
less weight than the fact that Europeans have a very limited time to
switch from old local currencies to the new.
It is still too early to
tell if the demand for Euros will rise as Europeans cash out of U.S.
Dollars. If the Dollar has been used as a “safe haven” to park
wealth during the transition, there is a strong potential for a reversal
in Euro/Dollar parity. In essence, Europeans cannot spend Dollars
in their local stores. Assuming the cash that was converted to
Dollars was short-term, the conversion should take place over the next
two quarters.
The Euro has been
frustrating because my fundamental perception has been correct while
precise timing was not. I predicted a decline in the Euro early in
2001 based upon my assumption that uncertainty would drive Europeans to
the Dollar. Adding to this exodus was the potential for conversion
and storage of local currencies in U.S. Dollars as shoe boxes and
mattresses were emptied in advance of 2002.
As the chart
illustrates, the Euro took a nosedive during the first half of last year
and proceeded to powerfully rally in July. The July rally was the
“fooler” because I jumped the gun in assuming this was the
pre-launch conversion back into Euros. Indeed, this may have been
an initial return to home base. However, September 11th clearly
interfered with the trend. Interestingly, the Euro’s September
break preceded the attacks. This suggests that someone was
realigning in anticipation of the pending events. While a rise in
the U.S. Dollar seems contradictory to an attack on U.S. soil, notice
how rapidly the Euro recovered before making an approximate 50%
retracement from the mid-September high.
Now that the Euro
“experiment” is a reality, we know that there is no panic… yet.
There has been a clear surge in demand that may be “the big one”
that pushes the Euro into even parity with the U.S. Dollar.
As mentioned in several 2001 REPORTS, I believe Europe’s new unified
economy is due for a currency-related boost. This would have been
more the case were it not for the new conflict over global terrorism.
Still, I can’t imagine the largest currency conversion in history will
not have a stimulating impact upon consumer spending. This simply
has to flush cash out into circulation.
The United States
introduced our new paper bills very slowly to avoid any inflation
potential. First came the $100, then the $50, and we are finally
at the $5. Eventually, the venerable George Washington will sport
a new face and position on the $1. This slow transition coupled
with relatively high taxes presented a very controlled environment.
Indeed, cash in circulation increased and we saw uncanny consumer
spending despite high interest rates. Even Uncle Sam collected
unprecedented revenues that led to an unexpected surplus and boastful
Clinton Administration.
Europe, on the other
hand, is condensing their conversion into half a year. This
pressure could lift transaction velocity higher than the current economy
is able to comfortably accommodate. Thus, Europe’s inflation
potential is higher than we saw in the U.S. currency conversion.
If inflation takes hold by mid 2002, expect to see Europe intervene with
monetary policy. While the old rule would have been to dump an
inflating currency, the new paradigm is to play the forward
spreads that reflect the higher rate of return available from the
depreciating currency.
The face of currency
trading is rapidly changing. Over the next few years, we will have
opportunities to ride roller-coasters in Euro/Dollar/Yen parity
differentials. However, I sense that the overall goal is to bring
these three major monetary standards back into a narrow trading range or
“acceptable band” much the way currency operated under the Bretton
Woods Accord.
Why should this happen?
After all, we saw a substantial boom for the U.S. economy over the past
10 years prior to the current recession. Incredible 25% to 40%
parity swings in the Euro since it’s inception and a massive plunge in
the Japanese Yen did not cause the monetary chaos so many economists
predicted when the world began weaning off fixed currency parity in the
1970s. If the new model works, why fix it?
A strong incentive to
bring parities close to even or some standard stems from the exhausting
and tenuous nature of government intervention and manipulation.
Over the last two decades, central banks have lost billions to currency
speculation. While it’s been fun, it hasn’t necessarily been
productive. Further, speculation has gotten in the way of
long-term plans established by the Group of 7 and the International
Monetary Fund. Wide fluctuations between currencies are not
desirable when attempting to regulate global trade and economic health.
Almost as important is
the general paranoia that exists between the new superpowers.
Granted, the U.S. wields the biggest military sword that previously
defined superpowers. Yet, when Japan, Inc. emerged as a
seemingly unstoppable economic juggernaut, the term “superpower” was
redefined. From 1960 through the present, I believe there is
little doubt that the Axis nations waged economic warfare in subtle and
significant ways. Taking advantage of peacetime economies while
NATO escalated the Cold War against communism, Germany and Japan emerged
as the largest economies other than the U.S. At the same time, a
consistent U.S. trade deficit exemplifies how America has been the
support mechanism for the rise of Germany and Japan.
Western Europe’s
unification leaps beyond the wildest dreams of the Great Wars
generation. Imagine how a World War II veteran perceives the
joining of Germany and France in an economic union with ten other
nations. Sixty years after the most insidious global conflict,
we’re all friends. It begs the question, “Why did the Great
Wars ever happen?” This philosophical question becomes important
when considering the direction Europe’s currency consolidation may
take. Is this global progress, or are we drawing a line in the
sand that will polarize the great trading regions of Western Europe,
America, and Japan?
While the Dollar soared
against the Euro, the Yen crashed against the Dollar. Now, the Yen
enters territory not seen in many years. In fact, we could see
tests of 1980 levels… the very levels that helped Japan destroy
the U.S. electronics industries.
The Yen’s free fall
has caught many currency traders by complete surprise. It is
impossible for them to imagine a value below 7000. Trust me.
This is not the kind of chart you use for bottom fishing.
This amazing realignment
presents additional opportunities. While I have not covered the
exotic derivatives like Euro/Yen, I feel these cross rates may become
particularly enticing. Consider the weekly Euro/Yen continuation
chart.
Does that look like
resistance to you? What are the possibilities Europe will become
defensive as the Yen sinks against the Dollar and Euro? After all,
Europe seeks a recovery, too.
In the meantime, the
U.K. has not joined in the Euro. Here, too, is a window of
opportunity. England is part of the Union, but is not able to
relinquish the Pound… yet. While the Pound, or
Sterling, or Cable has exhibited a volatile upward channel, the 40-day
average has crossed below the 20 to suggest technical weakness.
The channel is
threatened and the three-pronged resistance indicated by 1-2-3 are a
declining pattern. A bust below 14300 confirms a “correction”
or a serious downdraft. Technically, the stage would be set for a
test below 14000. If the Pound freefalls, there could be stronger
incentives to adopt the Euro. England is an island nation with few
resources relative to the Continent. Where can the Pound find
strength if the two world standards are the Euro and Dollar?
As I have asserted, the
new world order of currencies would be a breeding ground for huge trends
and profits. While the number of currencies is diminished by the
Euro, the dynamics are greatly enhanced. Absent the D-Mark, Swiss
Franc, French Franc, Lira, and other Euro currencies, I would not be
surprised to see a new interest in the Brazilian Real, Mexican Peso,
Australian Dollar, Canadian Dollar, and any other vehicles that can move
independent of the Big Three.
The Oil Connection
After bickering for half
a year, OPEC has formed a loose commitment to reduce world crude output
by 2 million barrels per day. Frankly, I am surprised and highly
skeptical of this latest announcement. Yet, it’s impact upon
crude has been pronounced as the chart demonstrates.
An upward channel formed
in anticipation of the eventual meeting of the minds between OPEC and
non-OPEC producers. This action managed to lift prices above
$20/bbl. after a mid November low below $17.50. I was convinced
the price would test $16.00 before finding support. However, I was
sensible enough to sit out the last two weeks because the action looked
suspicious.
Iran’s Euro twist did
not materialize in 2001. However, the Euro’s status is enhanced
by its reality. I believe 2002 has the potential to make the
oil-Euro connection. Equally intriguing, the Ruble may find
strength in Russia’s more substantial participation in world oil
markets. So far, the Ruble has been a sleeper. Russia
heavily relies upon the U.S. Dollar. Yet, when Gorbachev met with
former President Bush in Malta, the Ruble’s entry into the currency
main stream was an important focus.
One of the strangest
theories about the September 11th attacks proffered in recent weeks
relates a conspiracy that rivals the belief that the Viet Nam War was
fought over China Sea oil. The theory states that the U.S. needed
a catalyst to secure Afghanistan because it represents an extremely
important strategic objective relative to Kazakhstan. Just as OPEC
emerged from Middle East oil riches, so will the Caspian Sea region grow
in importance as its energy resources are tapped.
I have talked with
several military experts who claim that Bin Laden is well within our
sights… and has always been. We haven’t captured him because
such a success would limit our continuing pursuit and associated
military actions. We need a target.
In an age where
technology can smell a rat from 15,000 feet and detect a snake’s
movement in the blackest night, it is not likely we are unable to find
Bin Laden and his merry men. Is the real objective oil?
Email:
Phil@commodex.com
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