Wednesday, September 07, 2011
dollar crunch ahead
Here is a 100 pip box, one box reversal chart for the Euro currency against the dollar. As you can see the Euro has been trading sideways in an unusually narrow range for the past 4 months. Yesterday New York closed below 1.4050 after trading as low as 1.3975. I think a downside breakout from this narrow range is underway - a drop to 1.3900 would confirm this view. A point and figure count across this trading range projects downside potential to 1.2000.
What's going on here? The US dollar is a safe haven currency as are US treasury securities. The demand for dollar liquidity is going up because of the well-publicized problems of the European banks who hold large amounts of the sovereign debt of Greece, Spain, Portugal, and Italy on their books. As this process continues the European central bank and the US Federal Reserve are standing on the sidelines watching the show. They are NOT providing the extra liquidity the market is demanding. Unless and until they do the prices of other assets, predominantly equities, will fall to compensate. Worse, the European and the US economies will contract as a consequence of a liquidity crunch that will be first cousin to the one seen in 2008.
So a downside breakout by the Euro is telling us that world stock market's are in trouble and will head lower. Only a dramatic change in policy by the ECB and the Fed can change this prognosis. I might add that, after a delay, commodity prices, especially gold and oil, will feel the effects of this deflationary wind by going much lower.
Look out below!