Currencies: the storm will get worse – don’t confuse the waves with the tide!

In May 2010, at the peak of the "Euro crisis", LEAP/E2020 anticipated a 1.45 EUR/USD exchange rate by the end of 2010, while all experts expected a EUR/USD parity was coming soon !

As we announced in the previous GEAB issue, the storm tore through the currency markets and that will intensify. At the heart of a storm no-one can clearly forecast the size of every wave and we are in the middle of these waves in currency terms.

Indeed we consider that we have arrived at a crucial point of the crisis (the new tipping point announced in December 2009 for spring 2010) and that this transition towards a new state of the international system is causing major monetary turbulence. In the short term these developments are caused by the speculation of major players and the psychological war carried on through the major financial media. The Eurozone managed to « tame » the attempt to shatter its cohesion due to the rocketing cost of money for the Southern European countries. It must now face a twin pronged attack led, particularly, by speculators (hedge funds and major US and British banks) which had taken huge positions against the Euro before the 8/9 May Summit, thinking that the Eurozone would be incapable of organizing itself effectively. Now, they have been caught completely on the wrong foot by the European decisions and they are therefore currently maneuvering to get rid of these lost bets. There is an ideal option when one has their means to influence the market in the short term: artificially keep the trend going for a while longer in order to have a sufficient number of « dupes » to bet on the Euro falling and profit from that to reposition oneselve for a rising European currency. Those who remember the oil price moves in 2008 will understand the mechanism very well.

The other vector of attack on the single European currency comes from Washington and London. The latter, to hide for as long as possible the total impasse in which the United Kingdom finds itself, and Washington, because the financing of its indebtedness is becoming increasingly problematical with, in addition, for a number of US leaders, the fury of seeing the Eurozone becoming independent. Two good reasons to emphasize the situation and/or the sustainability of the Euro.

But the problem remains that the Dollar is losing value against gold and the major currencies of its trading partners (like Australia or Canada, for example - a fall of 10% since the beginning of 2010). According to our team, we are currently seeing a change totally unconnected to the long term trend of the Euro/Dollar, which has no reason at all to last. The true equilibrium rate is around 1.45 and we consider that will be the rate between now and the end of 2010. Beginning winter 2010/2011, at the moment when the United States will be caught in the crisis of its own indebtedness and when the tide of international financial flows goes out, the Dollar will, once again, plunge towards historic lows.

A last comment on the short term: the current Euro/Dollar exchange rate is a strong dynamic factor for European exports and on the contrary will cause an increased weakening in the US trade deficit, which in itself already explainss one of the drivers of the next rise in the Euro.