101 macro economics
Hi everyone,
It has been an interesting week with lots of interesting topics.
Quite a few caught my attention but let’s start with this question.
Is the EUR engineered to be lower in order to stimulate export?
Well if you have already a live trading account and still believe that the charts move randomly or only based on indicators and support and resistance levels, then it is time to wake up and start some macro economic research.
The answer is a clear YES!!!
OF COURSE IT HAS BEEN ENGINEERED TO LOWER ITS CURRENCY! IT IS THE CENTRAL BANKS JOB!!
These last years due to the 2008 crisis all central banks had to cut their interest rates! This is how central banks steer the price of a currency. Central banks control the interest rates of the national banks. When inflation goes up with to much consumption, the central bank increases rates and people start saving more and consuming less. Credit and loans get more expensive and people buy less, risk less opening new businesses. When inflation goes down, the central bank cuts rates, offering cheaper credit and loans, people buy more and businesses export more.
This works relatively well when you have one fiscal policy from the government and one monetary policy from the central bank.
Now the EuroZone is a complete different case. The European Central Bank provides one single monetary policy for all its country members, but each country has very different fiscal policies. A Government can backup some value to its currency according to its Gold reserves and that is why Germany is the key leader of the EuroZone with France.
Germany has its budget in track, while all southern countries do not and they have structural issues to overcome. Each country has different laws, different taxes, different deficits..without Germany many euro countries would now be in a deep recession with unsustainable bond rates and defaulting. The ECB has provided stimulus fairly for all euro countries banking system. Of course Germany with a healthy economy has benefited a lot from this with a lower euro and made incredible exports returns. If Germany would go back to the Deutschemark and the remaining countries would decide to keep the euro project going on, we could expect the Deutshemark to be above 1.30 eurusd today, but tomorrow the eurusd without the gold reserves from Germany to back it up and the safety of its strong economy to help the less strong economies, I believe that the eurusd would drop below 0.7 without any doubt!
Currently Germany economy risks to get to hot, over inflated. The euro has room to rise, but it fundamentally is a sick patient. If France goes anti euro in the following elections outcome it can be the start of the end for the euro project and a too high bourdon for Germany to carry on its own, unable to implement fiscal policies in all the other euro countries.
Besides the Central Banks, other factors do move the prices. For example if the dollar has some risk, some uncertainty, other currencies can be seen as a save haven asset, flight of risk or pure speculative bubble, independent of the central banks ability to contrary this speculative movements.
Here is a small video illustrating my comments and the European Debt crisis.
When relying only on technical analysis, it does not mean that when we revisit a last high, it will go down again. It means that last time at this level, with the fundamentals at that time, the buyers lost their battle against the sellers. Yes, it is likely that many sellers will be waiting for that level again. But what about the fundamentals?? The macro economics?? Are they the same? Or did we have a huge shift with divergence monetary policies since that time?
On the other hand, fundamental analysis, when a country is hiking rates it should mean a strong economy that is growing, business is growing, dividends should grow and bond yields should lower. But the central banks are political nowadays and some macro data manipulated. If a central bank increases rates but the core macro data is not suited to such an action you can see the currency going up on the expectations of a rate hike, but then when it actually hikes, the currency will go down. Buy the news, sell the event! It is not linear, a lot of factors have to be analyzed and considered.
Technical analysis gives you an edge where buyers and sellers are expected to enter. But no signal is 100% accurate. Ultimately what happens in the real world, outside the charts matter and drive the price. Have a plan and take advantage of this edge, never gamble, have always a plan and stick to your risk management.
Join Facebook group http://bit.ly/FBCLHedgeFundGroup and twitter https://twitter.com/CLInvestFund
