Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
The Gold Stocks Correction and What Lays Ahead - 19th Oct 19
Gold during Global Monetary Ease - 19th Oct 19
US Treasury Bonds Pause Near Resistance Before The Next Rally - 18th Oct 19
The Biggest Housing Boom in US History Has Just Begun - 18th Oct 19
British Pound Brexit Chaos GBP Trend Forecast - 18th Oct 19
Stocks Don’t Care About Trump Impeachment - 17th Oct 19
Currencies Show A Shift to Safety And Maturity – What Does It Mean? - 17th Oct 19
Stock Market Future Projected Cycles - 17th Oct 19
Weekly SPX & Gold Price Cycle Report - 17th Oct 19
What Makes United Markets Capital Different From Other Online Brokers? - 17th Oct 19
Stock Market Dow Long-term Trend Analysis - 16th Oct 19
This Is Not a Money Printing Press - 16th Oct 19
Online Casino Operator LeoVegas is Optimistic about the Future - 16th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - Video - 16th Oct 19
$100 Silver Has Come And Gone - 16th Oct 19
Stock Market Roll Over Risk to New highs in S&P 500 - 16th Oct 19
10 Best Trading Schools and Courses for Students - 16th Oct 19
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Euro Downtrend To $1.32 Under Construction

Currencies / Euro Feb 03, 2010 - 05:29 PM GMT

By: Ashraf_Laidi

Currencies

Best Financial Markets Analysis ArticleWe pointed out 2 weeks ago that the ongoing decline (weakening) of the once strong inverse correlation between equities and USD would lead to a scenario of prolonged US strength regardless of the evolving trend in equities. As the correlation weakened from a strong -0.94 in November to -0.26 in the 1st week of January, it enabled us to forecast further advances in the greenback irrespective of intraday or daily moves in equities. By taking the other side of the coin and using the daily relation between EURUSD and S&P500, the positive correlation has now fallen from +0.94 in November to a statistically insignificant +0.27 (9-month low).


And as the relationship between FX and equities fades away, the role of yield differentials is strongly back in play, especially for the high profile EURUSD rate. The chart below clearly shows the correlation between German & US 10 year yield spread and EURUSD at an 8-month high of +0.61. Such strong correlation implies that as US yields (now at 3.68%) further gain above their German counterparts (now at 3.22%), the USD dollar strengthens further against EUR, thereby dragging down EURUSD. As markets expect the ECB to maintain rates unchanged (no tightening) and more FOMC members to dissent against the stance of exceptionally low levels of fed funds rate for an extended period, the US yield foundation is expected to further work in favour of the USD against EUR. The $1.38 target issued in January remains intact with a 60% probability of seeing a $1.32 in March.

Deepening the analysis into the sovereign spread situation, it is worth noting a possible recurrence of a double-take, similar to that March 2009. The charts in the lower frame below represent the spreads of 10-year yields of selected Eurozone nations over that of Germany (considered the safest bond in the Eurozone). Greek 10 year yields soared to as high as 400 bps above those of Germany, while Portuguese and Spanish yields hit 129 bps and 0.98 bps respectively.

Although all of the spreads have now stabilized--partly due to EUs approval of Greeces debt plan, the risk for fresh jitters remain ample. The EU Commission said it was launching legal proceedings against Greece for unreliable fiscal statistics. As markets keep a close watch on Greece and its interaction with the Commission, the negative FX bias will remains specially that the EU has asked it to reduce its budget deficit to 3% of GDP by 2012 from above 12% today. The Commission will review Greece's progress on March 16, then on May 16,

While Greece and Portuguese debt are stealing the headlines, Spain's fiscal situation also merits focus. 4 months after it projected a 2009 deficit of 5.2% of GDP, Spain issued a new forecast of 11.4% of GDP. Not only data reliability is questionable, but so are any signs of any recovery. This week, Eurozone manufacturing PMI showed its fastest pace in reaching 52.4 in Jan, while Spains own PMI remained adrift in sub-50 territory at 45.3. With unemployment exceeding 4 million, the macroeconomic situation remains an obstacle to any austere fiscal policies.

Incorporating these dynamics with dissenting FOMC members and struggling global indices (have yet to regain their 55-day MAs), the US dollar faces prolonged upside ahead.

Follow me on twitter http://twitter.com/alaidi for more frequent market updates

By Ashraf Laidi
AshrafLaidi.com

Ashraf Laidi is the Chief FX Analyst at CMC Markets NA. This publication is intended to be used for information purposes only and does not constitute investment advice. CMC Markets (US) LLC is registered as a Futures Commission Merchant with the Commodity Futures Trading Commission and is a member of the National Futures Association.

Ashraf Laidi Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules