EURUSD : Eurozone Crisis vs Trump Crisis

18 сент. 2017 г.

 When Exchange Rate Mechanism system failed to stabilize national currency exchange rates within Europe, it led to the proposal of the adoption of a single European currency in 1995.And on January 1st, 1999 , 42 years after Europe's foundation, Euro was adopted as single currency by 11 member states.

                                          Today, Euro along with the US dollar is the world's most traded currencies, representing two largest economic trading blocs. The currency pair EURUSD, initially was not very volatile, however, things changed after US Subprime crisis. Euro traded at 1.52 against the Dollar in 2008 before Global Financial Crisis. Although the effect of a crisis in America would have had opposite effect on the valuation of Euro, it was just the opposite. From 1.52 against the Greenback, Euro started to fall. The reason was that another crisis was unfolding on the continent of Europe -the European debt crisis. The European Debt Crisis is a multi-year debt crisis which is in place since GFC and it's yet to find a long-term resolution. Many European member states held massive sovereign debt, A default would have had a domino effect, jeopardizing the future of European Union. Uncontrolled sovereign debt defaults could create a recession or even a global depression. The European Central Bank (ECB), the International Monetary Fund (IMF) and other member stats assisted countries like Greece, Ireland, Spain, Portugal and Cyprus to repay or refinance their government debt or to bail out over-indebted banks under their national supervision. Alan Greenspan - former Fed Governor - always said the Eurozone was doomed to fail because the effect of divergent cultures in the bloc has been grossly underestimated.

                                          After Trump being elected, the focus has now shifted back to America. I call it the Trump Crisis. The dollar soared preceding presidency of Donald Trump on the prospect that lower taxes, fiscal stimulus, and deregulation would boost the U.S. economy. But that scenario changed after the election, and the dollar index is now down 11.58% from its post-election high. Trump has gotten himself into, what's called as " currency wars " with Germany. Germany is the backbone of European Union, playing a pivotal role in policy making along with European central bank. The currency war is a dirty game at the higher most level of governance, where each one is trying to sell themselves as cheap. This currency tinkering is a quick-fix for underlying economic weakness. U.S. government debt is about 100% of GDP or 20trillion approx., and growing around $1 trillion a year. Forget what they say when they talk about budget deficits, They lie because they don’t want to admit what the true deficit is. When the next recession blows in, it will likely balloon the U.S. government deficit up to $2 trillion a year. The Obama administration took eight years to run up a $10 trillion debt after the 2008 recession. It might take Trump administration just half the time to add another $10 trillion, if Congress fails to pay its EMI this October.

                                           Coming from the analytical point of view on EURUSD, a long-term low has already taken place. That means a long-term high of USD has also taken place, considering the weight of Euro in Dollar Index. I see Euro making higher highs against the dollar for years to come - Dollar is doomed. In the medium term, i am expecting high in EURUSD around the first week of October at the level of 1.2150 - 1.2250. From there onwards, I am expecting EURUSD to trade down till the first week of November.

                                            As always, we will update when changing dynamics necessitates so.