David Gillie: The correlations between currencies and global markets is more complicated than a Hollywood alimony settlement. Let’s try to run through the food chain.
The stock market and commodities are dependent of the value of the Dollar. Of course, if the Dollar goes too low, commodities go way up and put pressure on equities. The Dollar is dependent of the Euro. Since the world went off the gold standard, currency has no actual value anymore—it’s all just “relative” to other currencies.
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The Euro is dependent on whatever is going on day to day in Greece. Greece is dependent on what the UCB and Mrs. Merkel decide Greece fate will be via bailouts.
Mrs. Merkel is dependent on getting front page in the media with a splashy headline that will move the market in that day’s desired direction.
The media is dependent on something to get people reading/watching so they can sell ad space at a premium.
I’ll stop there before I go into the advertisers. I think you get the point. Basically, the stock market that you have your life savings in is the plankton of the food chain. Much of all of this is hinging on the Euro.
CurrencyShares Euro Trust (NYSEArca:FXE) is the instrument for trading the Euro in the ETF world.
A 2.47% gain in a week may not seem like the hottest ETF out there, but for a currency, this is a gigantic move.
This is even more important by the fact that the media relentlessly pumped the story of the “Collapse of the Euro” for a year. The result was every time there was a talking head on the financial channels, the anchor would say “Good morning, John. How are you?” to which John would respond “Good morning, Adrian, I’m short the Euro. Thank you.”
Now everybody and they’re Grandma is short the Euro. This is just the condition that The Powers That Be (TPTB) love creating—a short squeeze and wildly whipping the market in the desired direction. The Federal Reserve can get double the impact buy using U.S. Dollars to buy Euros (yes, they can and do). This has a double impact on devaluing the Dollar and raising the stock market higher. Additionally, at extremely low volumes as of late, there is little resistance to wide swings in the market.
If you think that QE is over, think again. This morning The Fed dumped $5 Billion of “free” money in the market and the same is planned for tomorrow.
The Euro has broken the trend line to the upside. This was a strong, well developed trend. Furthermore, the Euro retraced to test support successfully and has had a strong bounce on reasonably good volume. There is a lot of room to move on FXE before it hits resistance at $139.00. It has now achieved three higher highs. Euro short positions must be getting VERY nervous.
If some of these short positions are forced to cover for the March 17 expiration, we could see the Euro gaping up much as we saw this past week. This in turn, Devalues the Dollar and commodities such as oil fly to the moon.
It’s a game of politics. Economies fare best with a low currency raising export profits. Of course, if the Euro goes too low, investors fear it not being a viable currency. If the Dollar goes to low gas prices go sky high and it’s hard to get people to drive to your summer political rallies with $5/gal gasoline. On the other hand, if the Dollar rises sharply, equities drop and it’s hard to make a campaign speech in front of a crowd that just saw their 401(k) account tank, again.
This rising Euro isn’t necessarily a recommendation to go out any buy Euros. It is a meter for gauging what’s driving the market and what direction it is headed.
The media is the top of the food chain. Watch carefully for the stories coming out of Europe (NYSEArca:VGK) and the Euro.
ETF Digest writes a subscription newsletter focused on technical analysis of exchange-traded funds. ETF Digest was founded in 2001 and was among the very first to see the need for a publication that provided individual investors with information and advice on ETF investing. Even if you’re not a fan of chart analysis, ETF Digest provides insight and commentary into which global markets are “working” and why.