Wednesday, March 13, 2013
dollar, yen, and euro
The basic economic forces driving the relative prices of currencies these days are central banks monetary polices. The Bank of Japan is now under great political pressure to move from a deflationary policy to a slightly inflationary one and in the process move Japan's annual rate of growth in nominal gross domestic product back to a more normal 5% level. The crash in the yen visible in the chart reflects investors' expectation that Japan's central bank will pursue this policy vigorously. I might add that the big rally in the Japanese stock market which has accompanied the crash in the yen is driven by the same force.
The Fed is also pursuing a QE program and I think will continue to do so well after the point where unemployment has dropped below 6.5%. But the Fed has been ahead of the QE curve for some time while Japan is just now starting to catch up - hence the drop of the yen against the dollar.
The European central bank is another story entirely. The ECB seems determined to sit on its hands while governments implement various degrees of austerity. This is a recipe for economic disaster in Europe. It will drive the euro higher against the dollar and thus contribute to Europe's economic malaise by making European goods and services more expensive relative to those produced by the US and Japan.
On the top chart I have illustrated my target for the euro which I think will be reached in a matter of months. The 1.40 level is the midpoint (purple line) of the current 1.19-1.60 trading range and by the time the market rallies to that level it will also encounter the declining trend line I have drawn through the tops established over the past few years. This 1.40 upside target may prove conservative if the ECB continues to pursue its current suicidal monetary policy. In that case the euro will probably move up into the 1.50-1.60 range.
The yen is getting very close to an obvious long term support level. The 100 level is the midpoint of the 1999-2011 bull market in the yen. In 2000 and again in 2005 there were tops in the 98-100 range which now should be support. So I think that the yen will drop into the 98-100 range and then rally substantially, maybe all the way to 108. But after that rally I would expect the current bear market to resume. Long term target is the 1999 low.