07 July 2010


The structure on the long term EUR/USD goes back a long way, those valuation spikes can be seen in 1995. This is what is causing the problems right now to a further rise, the resistance I talked about yesterday (but look at the jump in equities presaged by the rise in Euro).

Just to make some things clear: I think despite how things may seem, this is a good moment in time. While the financial crisis may have seemed devastating, it was really burning off leveraged debt, toppled by the fall of Lehman. They surely knew what the consequences of this would be, this is one reason I think sometimes the Fed and government knows what they are doing.

The financial system has not collapsed because they allowed another inflationary event to take the slack, the cheap cost of borrowing dollars. US companies are strong and remains strong and historically are stronger under pressure. That is not the problem, the problem is the consequences of this financial engineering.

The rise in Euro can be looked upon as a pushing up of Euro with big money, but my feeling is this has consequences through the economy, given Euro's role as a conduit through US assets (the rise in Euro changes the structure of this conduit). But not raising dollar rates makes this possible. This new rise in Euro makes fundamental sense now only because the Fed has put off a rate rise.

If the recovery is real, which at a guess I would say it is, it is just unstable because of the inflationary moves to stabilize the economy after the crisis, then this will take over and boost the market and allow inflationary measures to fade into the sunrise. But inflationary measures are the cause of the range in equities, a new Elliott Wave in the markets can surely only come from company growth.

If it comes from endless inflationary measures then expect more currency shocks. Whether an Elliott Wave can come from inflationary measures is an interesting question. The currency market suggests it can, but it suffers from the problems I mentioned, it has no reference to past events. Keep an eye on those valuation spikes.

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