Every major global currency is down against the US dollar for the past 200 days. This has been intentionally engineered by central banks and governments in order to stimulate their weak economies by devaluing their currencies in order to become competitive in global trade.
The Almighty Dollar
As has been talked about for many months in previous articles, the USD has been the key driver of the global economic situation. Below is a chart of the USD versus all major currencies over the last 200 days. Notice they are all down at least 8%. The euro continues to move towards decreasing parity with the USD and is down near 4% already in March alone. Bond yields throughout Europe continue to drop and in many countries there are negative interest rates already.
Currency devaluation occurs to make exports cheaper and more attractive to foreign buyers, while at the same time driving up import prices. This is done to discourage domestic consumers from purchasing foreign goods and instead buy goods from their own country. But with all major currencies doing it at the same time it has become a race to the bottom.
Right now the Euro is “winning” with its rate at a 12 year low, and and with the launch of QE that trend should remain in place.
In a recent Bloomberg article, Gary Shilling states this is a big problem for the US who had enjoyed the benefits of a weak dollar during its massive QE program. Shilling notes:
“But the Fed faces a dilemma: As other countries devalue against the greenback, the U.S. can't purposely knock down the dollar. As the world’s reserve currency, what could it be devalued against? A stronger dollar makes U.S. imports cheaper, which forces domestic producers to stay competitive by lowering prices and laying off employees to cut costs. A rising buck, then, works against the Fed’s goal of price stability and full employment.”
But now with the US economy in recovery and speculation of interest rates being raised very soon, the USD has surged to levels not seen since 2004, as the chart below shows.
As shown on the chart, the USD has blown through major resistance levels going back 20 years accompanied by the 50 month EMA (exponential moving average) crossover of the 100 month EMA. A major trend has reversed (USD in decline) and it appears that this is the early stages of a much bigger uptrend.
This will continue to put enormous pressure on the entire commodities complex as well since commodities are priced in USD. Below is a chart comparing the USD vs. CRB (which is a commodity index and holds most major commodities).
The other elephant in the room: The Yuan
China is trying to loosen monetary policy (2nd rate cut in 3 months) as the USD is surging. China is increasingly impacted by the Fed's policies as a result of two things: weaker currencies around the globe, coupled with China's quasi-peg to the USD, which over the past week has soared to fresh 13 year highs on expectations that the Fed will hike this summer.
This is having a negative impact on the profit margins of Chinese domestic companies and is in conflict with tightening monetary policy. Deflationary forces are at China’s doorstep, and this may mean the yuan will need to devalue, and quite possibly de-peg.
Bitcoin has also suffered from the surging USD, and as long as the uptrend remains in place this should continue to put downward pressure on the bitcoin price.
The most important chart in the world
From all of the data presented, the USD chart is the most important chart in the world right now, and as significant resistance levels are broken, more pressure will be felt by all the aforementioned central banks and governments.
How they will respond is still unknown, but it’s not setting up to be a friendly global macro environment. Call it what you want (devaluation, manipulation, or “currency war”), but the self interest of each country and its domestic citizenry are setting the ground for the next phase, and it is apparent that every country wants to cheapen their currency to gain a competitive edge against other countries.
But in the meantime, all eyes on the US dollar chart.
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