In response to the Italian Referendum which caused prime minister Matteo Renzi to resign, the Euro/USD took a dive from 1.0672 to as low as 1.0506.
The Euro has since rallied strongly, gaining 2.7 percent. What’s going on?
Euro/US Dollar 15-Minute Chart
What’s Going On With the Euro?
More than likely this is a combination of several factors:
- Traders positioned themselves heavily short the euro expecting the referendum to fail. Sentiment was extreme enough, there were few left to short.
- The referendum failed by a larger than expected amount, but Italy will not blow up or leave the eurozone immediately. Italy will leave the eurozone in due time, but the market won’t worry about that until the last moment as is the case in the typical European crisis.
- Axel Weber, Former Bundesbank Head Warns of Coming Rate Hikes by ECB.
Of the three items, points 3 and 1 are the most likely cause at the moment.
Major Top for US Dollar?
Looking ahead for the US dollar, the market is pricing in at least two rate hikes by the Fed, by June.
Chart from CME Fedwatch, anecdotes by Mish.
If those hikes do not occur as fast as expected, or the ECB tapers QE, the dollar is likely to decline, even if the ECB does not hike.
Related Articles
- Renzi Resigns Following Crushing Referendum Defeat: Beppe Grillo, Marine le Pen, Matteo Salvina Tweets.
- Great Timing Award: Wolfgang Schäuble Says “Greece Must Reform or Leave Eurozone”
- Axel Weber, Former Bundesbank Head Warns of Coming Rate Hikes by ECB.
Mike “Mish” Shedlock
Anecdotal sentimentâ¦
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Being the senior currency, The dollar seems to be on a secular incline. If the EU continues to have problems, I would suspect the EURO to continue to be weak. The DXY is over 100 right now-emerging market currencies in the tank
$US continues to strengthen against the yuan, as well.
King Dollar going nowhere anytime soon.
Dear Mr. Shedlock,
you wrote:^The referendum failed by a larger than expected amount, but Italy will not blow up or leave the eurozone immediately. Italy will leave the eurozone in due time, but …”.
Are you sure? Two things about it:
1-italian ordinary voting people don’t even want to hear about an hypothetical Itexit
2-Even Bruxelles “Nannycrats” think that Italy leaving Eurozone wouldn’t be a big business. (Can you read between the lines?)
Ciao
Patrizia
The nannycrats were worried about Greece for 6 years
They just stopped worrying, perhaps, but I doubt it.
Italy would be a major, major shock wave. Imagine Italy paying back Target2 imbalance in Lira, not Euros
The referendum had NOTHING to do with exiting. You don’t explain why you believe it will happen in “due time”. They have elections next year. We’ll see if conservatives promising to leave make headway.
As you pointed out even Greece isn’t leaving.
Brexit has to be considered in doubt until it happens. It appears to require an act of Parliament, and may be tied up in court for years.
I’m not a currency speculator and just spitballing but I see a pattern. In each case, (Brexit, Trump, Italy) the financial world improved. One or two cases suggest a PPT. Perhaps three. But a PPT is a temporary thing. All it can do is mediate a shock. Big money people are not sheeple unless the big flows are moving in a specific direction.
If the globalization rejection causes the same effect with number four, whatever it is, without a without a crash in the relevant markets, then I suggest the globalization effect was a convenient veneer. Maybe even a hindrance being made obvious now.
The equity markets and currency markets are disconnected from the debt markets the central banks are financing. The eventual collapse of the debt markets will have little to no effect on the other markets other than how interest rates on sovereign debt in a restructuring Eurozone might interrelate.
In other words, it’s a good thing and a positive sign for rate normalization. Equities have nowhere to go but up. Also, so do interest rates for savers/capital providers such as me. (Too bad about Europe, but Draghi did it to them)
Also, subtle proof the globalization gang was messing things up far far more then organizing them into a better world. They’re likely being told to go home now.
OK, ‘nowhere but up’ might be an overstatement. But the 20% to 50% crash talk in the background elsewhere is overstated. And any drop due to rate increases will be followed by a recovery as the real economy improves and is reflected in the equity markets.
what is this “rate normalization” you speak of?
I’m following long term US rates. They’re rising, probably in speculation that short term rates will be rising. Too soon to call a victory as the Fed has yet to change course. A Charlie Brown – Lucy – Football event is still possible. It’s also possible they will wait another 12 months for another 1/4% increase. Being a frustrated capital provider, I’m an optimist.
If I’m lucky, I have a plan that includes some decent interest income within a few months. I think the end of our long dark nightmare is nearly over.
Well, I won’t bore you with my position that I posit ad nauseam.
But let me point out that total debt / GDP has been steadily increasing. There can be no “normalization” (the good old days of 6% on the 10yr?) in yields until that reverses course.
This chart rules everything.
https://fred.stlouisfed.org/series/TCMDO
I’ll be ecstatic to see 4% or more on the on the 30 yr and nearly that on the 10 yr. That’s the new normal.
Sorry about the 2x post. Forgot to add my personals.
Though GDP numbers don’t actually reflect whether any activity is actually productive etc., for what it is worth I prefer as % of GDP for debt as to my thinking that must smooth out some of the relationship between debt creation and activity. Funnily, only Lacy Hunt has a now outdated graph in the first tens of image search… must be an updated version somewhere. Either way, until GDP can be kept positive and public debt decreased ( as %) , I don’t expect rates to rise unless there is the aim of a ‘forced’ restructuring
http://1.bp.blogspot.com/-gkrTJihSnAk/UlT_dNFiORI/AAAAAAAAXkc/DKQu1Cx-QZs/s1600/Hunt+1.png
Household Debt Service Payments as a % of DPI. This is a nice one for the optimists.
https://fred.stlouisfed.org/series/TDSP
Total debt to GDP has been in decline since 2010. I am re-reading Gary Shilling’s book : “The Age Of Deleveraging”
“Total debt to GDP has been in decline since 2010.”
No it hasn’t. It has gotten worse since 2010.
And the official debt number does not capture entire picture. The rise of leasing (and rent to owns) are not included. 1/3 of all new vehicle sales are leased …. compared to about 20% 5 years ago. Vehicles leases this year alone ~ $150 billion.
McKinsey wrote this in February of 2015 –
Global debt has grown by $57 trillion and no major economy has decreased its debt-to-GDP ratio since 2007. High government debt in advanced economies, mounting household debt, and the rapid rise of China’s debt are areas of potential concern.
http://www.mckinsey.com/global-themes/employment-and-growth/debt-and-not-much-deleveraging
” If I’m lucky, I have a plan that includes some decent interest income within a few months. I think the end of our long dark nightmare is nearly over.”
_____________
Do you have any tips you want to share ?
Many people won’t know how to act if interest rates return to historic norms.
As for me, I am looking forward to the end of the decade long drought.
Tony, I’ll be ecstatic to see 4% or more on the 30 yr and nearly that on the 10 year. That’s more like the new normal.
I’m looking at some fixed income mutual funds. Some deal with distressed debt, but really don’t look risky at all yet yield 2%+ more than ust 30. Also funds that deal with 30 year debt. I’m waiting to minimize capital loss risk due to interest rate changes. Regardless, must dive in by about April.
Interest rates have had “nowhere to go but up” in Japan for 20 years…
Japan marches to its own drummer. They are not normal and never will be. At least in my lifetime.
Japan suffered from age demographics and it’s only getting worse. We are not going to succumb to demographics disparities because we are importing all those Somalians to fill the age gap. Look at Milwaukee, it’s already working. The Somalians are spurring real demand for more deputies and police officers. Soon we will be ?booming” again.
http://a57.foxnews.com/media2.foxnews.com/BrightCove/694940094001/2016/03/12/780/438/694940094001_4798450343001_b3345ac8-65ea-46a9-97c8-d887520d1392.jpg
Importing hordes of third worlders to “solve” a first world demographic problem is like leaping from the frying pan into the fire. Most Japanese realize this… that maintaining their centuries old ethnic culture is more important than economics… this is heresy to globalists.
In 10 years we will admire Japan for their cultural steadfastness. If we are still here. Let’s see how Trump does with this issue… it’s our last chance. I am not optimistic for the long run.
I’m going to stick my neck out on a limb and predict there is a 50% chance of it going higher and a 50% chance of it going lower… Time to walk my dog.
100 % certain it will move if it doesn’t stay the same.
Not even sure I finished replying in prev. conv. with you or cdr, apology if left unanswered , and would have liked to chip in on Davos etc., but you can only take in so much properly in so much time etc.
I will be thinking of you finishing off the leftover haggis for breakfast, lunch and supper.
Enjoy.
The dollar is definitely topping, so this was probably close to the bottom for the euro, at least in the near term.
As we get closer and closer to December 14th, the Fed’s tightening has already been “priced in”. The 10-year Treasury yield has almost DOUBLED since early July.
I would not be at all surprised to see the USD actually give back some of its recent gains and the 10-year yield to back off quite a bit, after December 14th.
Classic ‘Buy the rumor, sell the news” vis-a-vis the USD.
I do not understand how 2 big dogs- Druckenmiller and Gunlach ? Can say the 10 year T-note will b at 6 percent within 2 years. If true what will the financial world look like assuming it still exists?
Not likely. Defies any rational logic. Must be hooked on a feeling.
” Must be hooked on a feeling. ”
__________
lol
I see what you did there.
As I just posted… normal interest rates were much higher when America was great… when America had factories and most everything Americans consumed was made in America… when families could live and thrive with stay at home moms and three to five children on the father’s sole income. I wonder if raising rates is somehow connected with “making America great again” ??
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I wonder if raising rates is somehow connected with “making America great again” ??
Yes!. Rates this low for an extended period of time are deflationary and cause investment to go more to the junk paper flipping variety than the type that creates jobs. Fantasy economics disagree with me and so do those few who profit immensely from low rates. I plan to spend like a drunken sailor when I get interest income coming in. So will many others who don’t spend as much now. You interest expense is my interest income.
I understand you.
I’m a saver, not a debtor… a lender, not a borrower.
I have put my major purchases on hold until interest rates rise.
Your interest expense is my interest income
Figure of speech.
The thing that puzzles me, though, is why something this obvious has been forgotten or is completely ignored by professional economists like those on the FOMC? You would think they never took econ 101.
20 years ago I read a book entitled, “Your Money or Your Life”, which basically advocated leaving the corporate rat race and living off the interest on your saved nest egg. That was back when interest paid on a 30 year treasury was around 10%. I was too young and poor to take advantage of that advice back then. Now, I have the nest egg… but interest rates are at historic lows.
” Must be hooked on a feeling. ”
___________
I think 1969… the year Americans walked on the moon… the same year that song was popular… was the height of the American golden age. But as with all golden ages,. the seeds of destruction were being planted… and the globalist serpent was already gnawing at the roots.
oouga chakka, ouuga chakka…
.
It’s all a matter of perspective.
Normal interest rates when “America was great” would be considered the end of the world now.
When I was a child, regular bank savings accounts earned around 6 percent compound interest. Wow… I wish I could get one of those now !
The mortgage rate on my first house was 9 percent… a rock-bottom rate for 1989. But my mother was holding the note… market rates were above 13%.
A few months before 9-11, I bought my current house with an interest rate of over 7 percent from Chase and that was a good rate for a 15 year mortgage !
Guys, guys — c’mon. Rates jumped up after the US election because the bond market is pricing in good things from TrumpEnomics. Personally, I think it will be a short-term sugar high from the stimulus spending he’s promised. Six months is about how far markets look. But if you remember back, we saw this when GW did tax cuts.
NIRP means the bond market is calling BS on the *recovery*.
If you believe higher rates will strangle any recovery due to the debt load, then you should be thinking of locking in income around mid 2017.
Governments /central banks manipulating the market/currency as usual.
My two cents. I am not a technical analyst, but I have played one on TV.
Intermediate term and long term… The Euro looks like SHIT. If I were long that thing, I’d be sleeping with one eye open. Prints a close below 105.. and I start playin Ludacris… Get out da way..
Dear Mish / or other readers……
What are the key driver’s behind gold’s fall? Why would US $ strength drive gold lower if other currencies are by proxy, weaker vs the dollar, doesn’t that mean that gold would rise in the aggregate if other currencies in the aggregate are dropping vs the US $? IS GDX the best way to play gold, other than buying physical gold?
He’s backkk… Kissinger again…. he will meet with Trump tomorrow [Tuesday.]
I knew it was no coincidence that Kissinger was in China while Trump spoke over the phone with Taiwan.
Sec of State position is still open.
I knew Trump made no mistake talking to Taiwan, but had no idea Kissinger was involved.
The games have begun!
For at least the next year, the U.S. Dollar is the only safe currency to park big money as well as small money in.
The U.S. has a history of fully recognizing old bills. Even a Green Back from the U.S. Civil War can be redeemed for a new U.S. Dollar (but it is worth much more to collectors). Most other governments retire old bills so they have no value. The U.S. has never done this so big money parks in short to intermediate Treasuries and small money parks in U.S. Dollars or U.S. Equities.
It is so fucking simple!
Weber’s tacit acceptance that Greece may just have to leave, right as Italy officially goes risky, can be interpreted as signal that there are limits to how far Germany is willing to go down the debasement route, in order to keep a few of its bankster shops nominally solvent by artificial means.
Germany can only remain Germany as long as they can retain their highly productive workforce. Which they can only do for as long as they pay them well. Which companies can only afford to do as long as the other inputs to their production, raw materials and available credit for capital, is cheap and in plentiful supply. Which requires a trusted, reliably strong currency that capital owners and materials producers never, ever, have reason to second guess the solidity of.
The Euro as currently constituted, will fail. The real question is whether it fails by kicking the deadbeats out, or by Germany and friends just bolting and leaving it to be the currency of the deadbeats. Weber’s statements goes some ways towards indicating Germany may still prefer the former. Which is Euro-positive.