Saturday, May 21, 2011

Currency Kisses

We all know there are different kinds of kisses. Since disciplined investing requires an avoidance of passion, I will stick to the physical contact of the act. Before the reader’s mind goes racing to a dark corner, I want to make sure we are all on the same page. When two lines on a chart touch, that’s a kiss. There is nothing tongue and cheek going on. It’s just a kiss. The reason it is a kiss is that when two lines touch each other on a chart, it is generally a meaningful touch. There is some significance to the touch.
In the case of the US currency, the dollar, and the European currency, the Euro, they have developed their own kind of kiss. It is a bit more of the ‘kiss my #%@’ or ‘you can kiss your you-know-what goodbye’ kind of kiss. In other words, the Euro and the US dollar are on opposite ends of a see-saw. When one goes up, the other goes down. Every couple of months for the past eight years, the USD and the FXE have been throwing a kiss at each other as they pass by on their respective trends. The chart below is the past 8 years with the USD in red/black and the FXE in black. This is a very simple chart but sometimes simple is profound. After all Einstein explained the universe with only three variables.
It is clear from the chart that we have a pattern. The two currencies can only stray so far apart. One goes up. The other goes down. Then, something happens and they begin moving towards one another. Whenever the trend changes for currency, the USD and the FXE continue until they touch and cross one another. Where are we right now in the currency trend? It would appear that the two currencies have reached the zenith of their parting and are now coming back together. What does this mean?
It is simple. The USD is going to strengthen and the FXE is going to weaken until they are at least close enough again to share a kiss. The two lines will soon be touching. This generally leads to some ‘X-Rated’ activity in the stock markets. Obviously there are some reasons for this behavior. In the US, the daffy Fed actually believes they can terminate QE2 stimulation and the economy will revive. That leads investors to think there will be an end to monetary/ credit expansion and therefore less dollars coming out of the printing press. The dollar should gain in value. The Euro is under pressure because the insane ECB has raised interest rates in the belief that the European economy has been resuscitated. Yet, it becomes more obvious each day that chronically debt-saddled members like Greece and Portugal are like cancerous tumors growing from the nose that continues to grow more bulbous each day from all the government lying. Therefore, the ECB is going to have to print more Euros and pretend they can fix a burnt steak. Both are laughable. Both are pathetic. Both are intoxicated by their usurped power. Both will fail.
In the near-term, should this pattern play out and realize a stronger dollar and weaker Euro, we all know what will happen to stocks. They will likely take a tumble. After all, the modern Fed has rendered all investments ‘commodities’ by their seizure of economic power from the masses. When the USD gets stronger, commodities get weaker. As the Euro weakens toward the dollar, it seems to be telling us all to “Kiss off!” Hey, the Euro doesn’t have to tell me twice. I’m not waiting for the kiss. I’ll take my portfolio and go home before I have to do so with lipstick on my collar. That’s real trouble!!

Past 8 years: USD in red/black, FXE in black
Chart courtesy
Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. Advisory services offered through BMF Investments, Inc.

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