In my first post every year, I stress that I focus on empirical observations and data rather than theoretical predictions. Yet, today, I will do exactly that, argue based on theory without having empirical proof that this is likely to happen. Furthermore, I will touch on something that I rarely talk about, namely currencies. No, I have not lost my mind, it is just something that I have been pondering for a while and I can’t really find an answer, so I wanted to reach out to my readers who know so much more about FX than I do. Maybe you can chime in. I promise, this post is one of the rare exceptions to my rule and normal service will resume tomorrow.
I talk as amateur, ex-fx trader. I think your prediction is right but for other reasons. I think that US dollar is the dominant currency when the fear is widespread. Post -GFC the mood was the money to be near FED, but Fed 's huge covid intervention has changed this . Market believes that the FED always will bail out the investors. No fear at all, even if FED has increased its rate so much. Normally $ should have inreased more, but it hasn't. The US fiscal extravaganza is additional factor that support this narrative.
I am not a FX specialist; but, as such, I am like the majority of private investors.
If £/ $ falls, my US shares rise when denominated in GBP£, and vice versa. Over time it averages out. You can buy $ Funds hedged back into GBP£ but this has an extra expense. Thus I ignore FX rates.
'Meanwhile, the European stability mechanism forces most Eurozone countries to cut their deficits in 2024 and 2025'
1) This is supposed to happen in a Europe with a voter swing to the right. And that's not exactly the austerity right.
2) Energy is 3 x as expensive while important EU industrial sectors have lost a lot of production: Germany heavy industry - 10%, NL - 5% etc. Plenty reason for industrial policies (hello France!) and the corresponding spending disguised as a supposed energy 'transition'. Which in reality is a transition to US lng...
Adding to that the fact Europe has suddenly found a wish to be more strategically autonomous when it comes to commodities' mining and processing (after decades of exporting those and the corresponding CO2 emissions and pollution, making EU environmental & climate policy shine for a moment), the EU and gov's will have to make a move here. If they're serious.
3) It is supposed to happen in a political environment which has upped the discussion of reforming the stability mechanism.
4) It's also happening in an EU which the past years has organized 100s of billions for covid 'stricken' economies. For instance Italy's digital green economy, which is supposed to happen via EU B's. Though it is not really coming off the ground. Often the money is spend to realize other objectives. But, most importantly, most of the money hasn't entered EU economies yet.
The money is not really spend on economic covid 'pains', it's spend on the wants of the commission. (Although i think they may want to rearrange the segments 'Neighborhood and the world' €110.6 billion and 'Security and defence' €14.9 billion...https://tinyurl.com/32te6sxc)
For instance the Digital Europe Programme https://tinyurl.com/3f67ffx2 'bringing digital technology to businesses, citizens and public administrations' now also funds bringing 'Europe’s digital transition and cybersecurity' https://tinyurl.com/mv8cf6ba
I.e. our future digital identity and passport. No questions asked.
And since bureaucracies always grow, the digital trans & cyber sec program also funds 'climate and environment protection challenges through supporting the next phase in the evolution of the digital twin of the Earth - Destination Earth, establishing a green deal data space and preparing a Digital Product Passport to enable circular economy'.
Though this was probably written after evening drinks, just like 'Post-COVID-19 Europe will be greener, more digital, more resilient and better fit for the current and forthcoming challenges'.
5) The EU is looking for B's for the EU weapons industry which has been hammered by virtue signalling ESG investors (just like they hammered energy exploration and mining, making the energy 'transition' a rather costly and not just unproductive but anti-productive affair). The EU commission has also called for collective defense orders, the financing of those is for memberstates to figure out. Just like which country's companies are going to benefit and which will lose.
6) The way EU investments are curbed by gov's and the EU commission does not suggest future productivity growth - which is already declining. In an ageing EU, with an ever growing segment of society, mainly academics, working in gov, ngo's, academia, ie not being productive, this suggests more financial assistance, not necessarily financed through budget cuts or > taxes.
To summon up: aggravated voters; an ambitious EU commission, massive (support) funding needed for EU industries; UA financial assistance; an extremely costly energy 'transition' which will result in (further) productivity decline; growing defense budgets; with businesses moving abroad or investing there, i think there's not that much space for a return to the EU of old.
Amateur view from Europe here: I think that the influence of the fiscal deficit on currency should also depend on what the debt is used for. E.g. Richard Vague argues in his book "the paradox of debt" that debt has been an important driver for economic growth in the USA. And I think that a reason for this may be how the USA have been using debt: just to contrast USA and Europe: IMO the USA are using a large part of their debt for investments, while we in Europe are using debt mostly for consumption, saving EU states from bankruptcy, and increasing social transfers. I think that If you use debt to drive growth, then this growth will lead to increased GDP, increasing inflation, rising interest rates and this should drive the valuation of a currency upwards. The way we Europeans are using debt should drive currency valuation downwards (and if you look at the data: EUR/USD has been in a downwards trend since the financial crisis of 2008)
good theory/observation. It all comes down to: weak economies have weak currencies. Nobody got happy with Argentian pesos, or whatever the current name was. On the other hand, a Europe with sick man Germany doesn't per se have to be weak. Plenty of potential in the Nordics, Baltics, NL, F, ES and PT.
Makes a lot of sense to me. That said, I am only experienced in FX inasmuch as I've managed to be on the wrong side of currency markets more often than I'd like to say.
In particular, I'd like to learn more about the inverse relationship between the S&P500 and the USD. For quite a time now one went up when the other went down, and vice-versa. In which times does this happen, and can we expect it to continue?
Are there real forex specialists?
...just kidding
I talk as amateur, ex-fx trader. I think your prediction is right but for other reasons. I think that US dollar is the dominant currency when the fear is widespread. Post -GFC the mood was the money to be near FED, but Fed 's huge covid intervention has changed this . Market believes that the FED always will bail out the investors. No fear at all, even if FED has increased its rate so much. Normally $ should have inreased more, but it hasn't. The US fiscal extravaganza is additional factor that support this narrative.
I am not a FX specialist; but, as such, I am like the majority of private investors.
If £/ $ falls, my US shares rise when denominated in GBP£, and vice versa. Over time it averages out. You can buy $ Funds hedged back into GBP£ but this has an extra expense. Thus I ignore FX rates.
'Meanwhile, the European stability mechanism forces most Eurozone countries to cut their deficits in 2024 and 2025'
1) This is supposed to happen in a Europe with a voter swing to the right. And that's not exactly the austerity right.
2) Energy is 3 x as expensive while important EU industrial sectors have lost a lot of production: Germany heavy industry - 10%, NL - 5% etc. Plenty reason for industrial policies (hello France!) and the corresponding spending disguised as a supposed energy 'transition'. Which in reality is a transition to US lng...
Adding to that the fact Europe has suddenly found a wish to be more strategically autonomous when it comes to commodities' mining and processing (after decades of exporting those and the corresponding CO2 emissions and pollution, making EU environmental & climate policy shine for a moment), the EU and gov's will have to make a move here. If they're serious.
3) It is supposed to happen in a political environment which has upped the discussion of reforming the stability mechanism.
4) It's also happening in an EU which the past years has organized 100s of billions for covid 'stricken' economies. For instance Italy's digital green economy, which is supposed to happen via EU B's. Though it is not really coming off the ground. Often the money is spend to realize other objectives. But, most importantly, most of the money hasn't entered EU economies yet.
The money is not really spend on economic covid 'pains', it's spend on the wants of the commission. (Although i think they may want to rearrange the segments 'Neighborhood and the world' €110.6 billion and 'Security and defence' €14.9 billion...https://tinyurl.com/32te6sxc)
For instance the Digital Europe Programme https://tinyurl.com/3f67ffx2 'bringing digital technology to businesses, citizens and public administrations' now also funds bringing 'Europe’s digital transition and cybersecurity' https://tinyurl.com/mv8cf6ba
I.e. our future digital identity and passport. No questions asked.
And since bureaucracies always grow, the digital trans & cyber sec program also funds 'climate and environment protection challenges through supporting the next phase in the evolution of the digital twin of the Earth - Destination Earth, establishing a green deal data space and preparing a Digital Product Passport to enable circular economy'.
Though this was probably written after evening drinks, just like 'Post-COVID-19 Europe will be greener, more digital, more resilient and better fit for the current and forthcoming challenges'.
5) The EU is looking for B's for the EU weapons industry which has been hammered by virtue signalling ESG investors (just like they hammered energy exploration and mining, making the energy 'transition' a rather costly and not just unproductive but anti-productive affair). The EU commission has also called for collective defense orders, the financing of those is for memberstates to figure out. Just like which country's companies are going to benefit and which will lose.
6) The way EU investments are curbed by gov's and the EU commission does not suggest future productivity growth - which is already declining. In an ageing EU, with an ever growing segment of society, mainly academics, working in gov, ngo's, academia, ie not being productive, this suggests more financial assistance, not necessarily financed through budget cuts or > taxes.
To summon up: aggravated voters; an ambitious EU commission, massive (support) funding needed for EU industries; UA financial assistance; an extremely costly energy 'transition' which will result in (further) productivity decline; growing defense budgets; with businesses moving abroad or investing there, i think there's not that much space for a return to the EU of old.
Maintenant nous sommes tous un peu Français.
Amateur view from Europe here: I think that the influence of the fiscal deficit on currency should also depend on what the debt is used for. E.g. Richard Vague argues in his book "the paradox of debt" that debt has been an important driver for economic growth in the USA. And I think that a reason for this may be how the USA have been using debt: just to contrast USA and Europe: IMO the USA are using a large part of their debt for investments, while we in Europe are using debt mostly for consumption, saving EU states from bankruptcy, and increasing social transfers. I think that If you use debt to drive growth, then this growth will lead to increased GDP, increasing inflation, rising interest rates and this should drive the valuation of a currency upwards. The way we Europeans are using debt should drive currency valuation downwards (and if you look at the data: EUR/USD has been in a downwards trend since the financial crisis of 2008)
good theory/observation. It all comes down to: weak economies have weak currencies. Nobody got happy with Argentian pesos, or whatever the current name was. On the other hand, a Europe with sick man Germany doesn't per se have to be weak. Plenty of potential in the Nordics, Baltics, NL, F, ES and PT.
Makes a lot of sense to me. That said, I am only experienced in FX inasmuch as I've managed to be on the wrong side of currency markets more often than I'd like to say.
In particular, I'd like to learn more about the inverse relationship between the S&P500 and the USD. For quite a time now one went up when the other went down, and vice-versa. In which times does this happen, and can we expect it to continue?