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Thoughts on the Euro, the Dollar, and a Long Term EUR/USD Count

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March 23, 2010 – Comments (7)

Protechtor has a very nice long term EUR/USD count here: EUR/USD Longer Term View going back to 2007/2008. It prompted me to go back and review my long term EUR/USD count.

It is not secret that I am bearish on the US Dollar, both fundamentally and technically. For my fundamental picture, see here: Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog and actually I wrote a post on my other blog today that discussed this topic in more detail (inflationary policies by the Fed, debt saturation, why stocks will fall in an inflationary environment / stagflation): Debt Saturation

And there is another big reason why I am bearish on the Dollar long term: the EUR/USD count.

Now don't get me wrong. I am not Euro bull at all (being bearish the Dollar does not make me a de facto Euro bull. There are much better currencies out there). But there is a very interesting long term fundamental stack up between the Euro and the Dollar:

The Federal Reserve Note (the US Dollar)

-- The Dollar is governed by the Fed who is headed by politicians posing as economists and will *always* turn to the politically expedient action of debt monetization. Despite any rhetoric to the contrary, these are the Fed's actions. Until this is proof to the contrary, this should be the assumed going forward position.
-- "But the monetizing cannot keep up with the rate that debt is collapsing and therefore we will have deflation" ... I don't buy this for a second. QE-I was the opening salvo, and if you don't think there will be a QE-II then I think you will be surprised.
-- Essentially the US Dollar will be treated by our policymakers as economic toilet paper, who are not inflation hawks and will continue to perpetuate the myth that monetary inflation = price inflation and if we don't experience price inflation then monetary inflation is "ok" (THIS IS **WRONG!!!**. Monetary Inflation is a cause and price inflation is an effect. And like any cause and effect in economics there is a lag. By the time price inflation is generally detectable, the rampant monetary inflation will have created vast amounts of damage. These cycles have occurred many times and will occur again)

The Euro

-- Right now the Eurozone is a mess of failing economies and unhealthy economic activity
-- But painting Europe with a broad brush is not only misleading, it is incorrect
-- Germany is not only by far the strongest economies in Europe, it is one of the strongest economies in the world. Germany is a saving society. The Mittelstand companies (small/medium firms, mostly family owned) is exactly the economic model that most of the western world should be following. High exports and a strong currency.
-- So let me lay out this for a scenario: The Euro continues to have problems based on the constituent parties that have economies in rough shape (Greece, Spain, Portugal, etc.). But Germany and Switzerland, and to a lesser extent France and Belgium are in much better shape. What if the Euro morphs into a "consolidated" Euro based on the currencies of the stronger economies
-- While still fraught with problems, I would still say on a relative basis the Euro has more future opportunity to become stronger than the US Dollar. Especially as the ECB is much more hawkish on inflation than the Fed.

Compounding the fact that in the world of Debt Saturation, economies and currencies that are based on real goods (such as the Canadian Dollar and the Australian Dollar) will outperform the US Dollar.

So, based on this argument, and the links at the beginning of the post, I am bearish on the US Dollar Index, and a number of Dollar currency pairs for the long term, and am more bullish on the Euro than the Dollar (not enough to *actually* be bullish, just as a relative measure) over the long term.

Here is the technical picture of the EUR/USD that backs up that story:

ENLARGE

The move from 200-2008 looks like a very clear 5-wave move and we are in the middle of an ABC zigzag retrace.

The EUR/USD could do a double bottom for the C wave at ~1.20 (50% retrace), but I believe it will make a run for the support zone at 1.12 (62% retrace).

This means my long term forecast for the US Dollar is down (and no, that is *not* bullish for stocks over the long term as I explain here, as the stock market and the Dollar will resume their long term stance, which is positive correlation)

ENLARGE

7 Comments – Post Your Own

#1) On March 23, 2010 at 9:39 AM, XMFSinchiruna (27.08) wrote:

Great analysis and discussion, as always!! :)

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#2) On March 23, 2010 at 10:04 AM, portefeuille (99.67) wrote:

But Germany and Switzerland, and to a lesser extent France and Belgium are in much better shape. What if the Euro morphs into a "consolidated" Euro based on the currencies of the stronger economies

What about the Netherlands?

I don't think Switzerland has any interest in a "common currency". It is not even part of the EU and so far all countries that have adopted the Euro are members of the EU. 

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#3) On March 23, 2010 at 10:07 AM, portefeuille (99.67) wrote:

------------

A pseudo solution to the central failing of a currency

...

The least damaging solution now might be a north/south split of the currency. Imagine a "neuro" and a "sudo" (pseudo in Greece). For every €100 you would receive 50 neuros and 50 sudos. Countries would from then on opt to use one or the other. Existing obligations - including the national debts of all current eurozone members - would thus have a hard and soft component. Readers can amuse themselves by guessing which currencies some of the more ambiguous countries might choose.

...

------------ 

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#4) On March 23, 2010 at 10:24 AM, ralphmachio (28.44) wrote:

Long term, but won't any drop in the dollar create a short term rally? 

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#5) On March 23, 2010 at 10:48 AM, binve (< 20) wrote:

TMFSinchiruna,

Hey Sinchi! Thanks man, I appreciate that!

portefeuille ,

Thank you.

>>What about the Netherlands?

Yep, good call

>>I don't think Switzerland has any interest in a "common currency". It is not even part of the EU and so far all countries that have adopted the Euro are members of the EU

Very good point.

That is what I get for writing posts at 4 am :(

That link in comment #3 is a *very* interesting proposition.

ralphmachio,

Hey man! Like I discuss here
http://caps.fool.com/Blogs/ViewPost.aspx?bpid=330962#comment331037 The dollar and equities (as a general asset class) are in the process of transitioning from an nearly inverse relationship like we had through most of 2008/2009 to one where they will be mostly positively correlated. I think that transtion will take many months, if not a year or more. 2010 will be market by both inverse and positive correlation with the dollar, and I think it will be difficult to play the "correlation trade" while it is in this flux. My $0.02..

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#6) On March 23, 2010 at 7:47 PM, adanlerma (< 20) wrote:

binve, found your article via my google eur usd search!

nice! lotta good points to think about -

what about near term? next few months to later this year? still more up eur than usd?

take care, glad i spotted this  ;-) 

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#7) On March 24, 2010 at 2:04 AM, binve (< 20) wrote:

adanlerma ,

Hey adan!

>>found your article via my google eur usd search!

Right on! :)

>>what about near term? next few months to later this year? still more up eur than usd?

Nope, I think the next several month will be a genrally lower Euro / generally higher dollar. I think the EU crisis (crises) and the Dollar Carry Trade unwind will still propel those trends.

I think the currency shifts start happening later this year, maybe in 2011.

But my gut is saying that stock market moves will start decoupling from the currency moves before that takes place. Just a hunch.

Thanks!..

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