The largest tailwind for the commodity bull market is set to continue according to FX analyst Kit Juckes at Societe Generale. Juckes believes the Euro is headed back to 1.55 EUR/USD:
“When the dam breaks you get washed out. Taking out position concentrations is a favourite sport in a range trading environment and the world is certainly heavily USD short. As the Fed stays on hold more than is currently expected, EURUSD is likely to once again overshoot and head for 1.55, the top of our now higher EURUSD forecasts.
Juckes sees the current dip in EUR/USD as a buying opportunity as the Fed is likely to remain tight, the German economy strengthens and the European sovereign debt crisis doesn’t cause any significant economic disruption:
“EURUSD is likely to once again overshoot and head for 1.55. Current dip is providing buying opportunities for the EUR against USD as:
Source: Societe Generale
SG could be right. On the other hand, there are a whole slew of investors who are leveraged up on the back of QE2 and looking for any good excuse to get scared and his the bids. Most of this is borrowing in USD and buying commodities and equities. If that trade unwinds for any good reason then we could easily see the EUR slip back to 1.30 or lower in a heartbeat as a fear takes over.
I think the dollar index, if nothing else, looks like a decent hedge here, but I wouldn’t buy it only against EUR.
Cullen, do you still like a Franc and Australian $ short? You had some nice timing with your recent mention of them? Thanks.
100% agree on all points. I’ve been talking about using broad USD longs as hedges against turbulence. Franc and Aussie have been smacked pretty good recently….
I’m curious if some of SG’s optimism regarding the Euro isn’t somewhat self-serving. A few problems I have with each assumption:
1) “The Fed stays on hold more than currently is expected” – how much more can they be on hold than currently expected? Nobody believes they are seriously considering raising interest rates in the foreseeable future if for no other reason than that has been their stated outlook for some time. Aren’t investors already factoring low rates in the U.S. for an extended period into their forecasts? If not, where have they been for the past 24 months?
2) “German economy is booming despite the level of the euro” – fine, fair enough, but how long can the German economy, which exports a significant amount of goods to China, continue to outperform expectations if the Chinese economy begins to slow, as can be reasonably expected given increased reserve requirements and higher interest rates in China?
3) “Euro's fate will depend on how the ECB reacts to developments in the center vs periphery. Assuming peripheral risks stay constant this is bull euro.” – that’s a pretty bold or naive statement. Considering the amount of political infighting that likely remains before the sovereign debt crisis can be resolved, I’m not certain I would pin my EUR/USD outlook to the assumption that we’ve seen the worst in terms of political backlash from the citizenry and leadership of both debtor and creditor countries within the Euro zone.
I’m not saying SG is wrong, I just have a hard time buying their rationale. And when you look at the large amount of cash on bank and corporate balance sheets, I don’t think we’ll see any shortage of buyers of U.S. treasuries once the Fed ends QE2, which would be USD positive in relation to the Euro. Even with short term rates at 0%, why wouldn’t banks and corporations seek to put at least some of this cash into intermediate and long term bonds?
http://cms.ewcub.webnode.sk/images/200002083-6f5947052f/EURUSD_May15_daily.png
I think we saw a definitive turnaround recently – as orange line touched lower horizon, retracement UP is a topical matter, however when this retracement is finished, we should see again a down move deeply under 1,40… the multiweek trend is already DOWN now..
http://usawatchdog.com/double-digit-inflation-has-arrived/
And get this, inflation is already in double digits, according to Williams, if it was calculated the way BLS did it more than 30 years ago. Williams said, ". . . based on reporting of 1980, the April 2011 annual inflation rate would have been about 10.7%." But, the double digit inflation story is not the one the mainstream media likes to tell. Instead, it usually focuses on what the government calls "core" inflation that excludes food and energy. The "core" inflation rate is .2%. Who lives in a world where the core of existence is not food and energy? A .2% core inflation rate is both preposterous and insulting to anyone living in the real world.
Inflation isn't always easy to spot these days because manufacturers are packaging things so you pay the same but get less. Last week, a Marketwatch.com report said, "While prices for many goods are rising, in cases where prices are steady, the packaging frequently is smaller. It's an unmistakable trend for grocery shoppers these days: every other package seemingly has a "?great new look' for the "?same great price.' The problem is that the new look is a few ounces smaller than the old packaging. Or there has been some other creative way to have shoppers pay the same money as always without recognizing that they are bringing less home."
“Who lives in a world where the core of existence is not food and energy?”
The same people who have home values that dropped by 25%. Try telling them everything costs more. If you want to include food and energy then you have to include housing, in which case, headline inflation is nowhere near 10%.
Good point, Brennan.
I’ll add that in the long-run: Headline Inflation – Core Inflation = 0
Thank you..really informative!!
Currencies trade base on prevailing interest rates of there respective country,
But at the present time base on its buying power the US dollar is very low.
The US dollar will buy much more in the US than it will if converted and used in the currencies of most industrial countries.
The UD dollar buys more but investors look at the rate of return. This is one more example of Central banks distortions.
Some are and will use this as a way to arbitrage using there strong currency to invest in equivalence in the US at much lower cost.
The DXY has clearly bottomed for the short and intermediate term (evidenced by the break of the 50EMA which we haven’t traded above since beginning of the year) and any EUR move up to $1.50 or above is wishful thinking. This dollar strength will continue, IMO, for several months until the Fed once again announces another round of QE. There will be a great buying opportunity for commodities and the Aussie dollar (which correlates nicely with metals) but it’s just not yet. Dollar short is too crowded of a trade and some more bloodshed needs to occur before USD once again heads lower. Sorry Kit but I’m on the other side of this trade. See you at $1.30.
Agree with VCC, With the Fed out of the way when QE2 ends, a possible rise in interest rates and therefore a rally in the dollar, I don’t see the EUR anywhere near its recent highs in the short-medium term.
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The largest tailwind for the commodity bull market is set to continue according to FX analyst Kit Juckes at Societe Generale. Juckes believes the Euro is headed back to 1.55 EUR/USD:
“When the dam breaks you get washed out. Taking out position concentrations is a favourite sport in a range trading environment and the world is certainly heavily USD short. As the Fed stays on hold more than is currently expected, EURUSD is likely to once again overshoot and head for 1.55, the top of our now higher EURUSD forecasts.
Juckes sees the current dip in EUR/USD as a buying opportunity as the Fed is likely to remain tight, the German economy strengthens and the European sovereign debt crisis doesn’t cause any significant economic disruption:
“EURUSD is likely to once again overshoot and head for 1.55. Current dip is providing buying opportunities for the EUR against USD as:
Source: Societe Generale
SG could be right. On the other hand, there are a whole slew of investors who are leveraged up on the back of QE2 and looking for any good excuse to get scared and his the bids. Most of this is borrowing in USD and buying commodities and equities. If that trade unwinds for any good reason then we could easily see the EUR slip back to 1.30 or lower in a heartbeat as a fear takes over.
I think the dollar index, if nothing else, looks like a decent hedge here, but I wouldn’t buy it only against EUR.
Cullen, do you still like a Franc and Australian $ short? You had some nice timing with your recent mention of them? Thanks.
100% agree on all points. I’ve been talking about using broad USD longs as hedges against turbulence. Franc and Aussie have been smacked pretty good recently….
I’m curious if some of SG’s optimism regarding the Euro isn’t somewhat self-serving. A few problems I have with each assumption:
1) “The Fed stays on hold more than currently is expected” – how much more can they be on hold than currently expected? Nobody believes they are seriously considering raising interest rates in the foreseeable future if for no other reason than that has been their stated outlook for some time. Aren’t investors already factoring low rates in the U.S. for an extended period into their forecasts? If not, where have they been for the past 24 months?
2) “German economy is booming despite the level of the euro” – fine, fair enough, but how long can the German economy, which exports a significant amount of goods to China, continue to outperform expectations if the Chinese economy begins to slow, as can be reasonably expected given increased reserve requirements and higher interest rates in China?
3) “Euro's fate will depend on how the ECB reacts to developments in the center vs periphery. Assuming peripheral risks stay constant this is bull euro.” – that’s a pretty bold or naive statement. Considering the amount of political infighting that likely remains before the sovereign debt crisis can be resolved, I’m not certain I would pin my EUR/USD outlook to the assumption that we’ve seen the worst in terms of political backlash from the citizenry and leadership of both debtor and creditor countries within the Euro zone.
I’m not saying SG is wrong, I just have a hard time buying their rationale. And when you look at the large amount of cash on bank and corporate balance sheets, I don’t think we’ll see any shortage of buyers of U.S. treasuries once the Fed ends QE2, which would be USD positive in relation to the Euro. Even with short term rates at 0%, why wouldn’t banks and corporations seek to put at least some of this cash into intermediate and long term bonds?
http://cms.ewcub.webnode.sk/images/200002083-6f5947052f/EURUSD_May15_daily.png
I think we saw a definitive turnaround recently – as orange line touched lower horizon, retracement UP is a topical matter, however when this retracement is finished, we should see again a down move deeply under 1,40… the multiweek trend is already DOWN now..
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