Why the Euro will outperform the U.S. Dollar

The last few months, we noticed that the euro had significantly outperformed the U.S. dollar since August 2012, right when QE3 was going to be announced (Chart 1). I see conditions in the Eurozone improving and soon the markets will focus on problems in the U.S. instead of the Eurozone. Therefore, I believe the uptrend in the euro will continue and I'll explain why.

(click to enlarge)

Chart 1: EUR/USD

As I pointed out earlier in this article, strong currencies are likely to have strong bond markets. So, if we see a strengthening bond market for a certain country, we can be almost sure that the currency of that country will appreciate in value against other currencies.

There are other indicators like PMI, central bank balance sheets that influence the currency of the country.

Go here to read the analysis.

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QE3 So Far: Nothing!

Let's give a status update on the QE3 $40 billion/month MBS buying and $45 billion/month U.S. treasury buying.

If we take a look at the federal reserve balance sheet, we see that in October 2012, nothing at all has happened. The amount of treasuries is constant (light brown + orange area). The amount of MBS is also constant. The balance sheet is even shrinking instead of expanding!

Chart 1: Federal Reserve Balance Sheet

This can be confirmed here.

Table 1: Federal Reserve Balance Sheet Detailed

So where is the promised QE3, Mr. Bernanke?

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Predictions all Came True!

Just a little pat on my own back.

QE3 was announced on 13-14 September 2012, it was predicted that they would by MBS and bonds, Eric Sprott premiums on silver went up, bond yields went up, LCNS went up, silver broke out.

All predicted in this August 2012 article.

Now the only thing that remains is the JPM silver manipulation. That will ultimately happen when physical shortages in silver start to emerge and we already see that happening. So brace yourself for a spike in silver!

See Kingworldnews: Mounting shortages in gold and silver.

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Large Portion of QE3 Goes to Interest Payments on U.S. Debt

On 13 September 2012, Ben Bernanke announced a third round of quantitative easing also known as QE3. What the federal reserve will do is buy $40 billion in MBS and $45 billion in 10-30 year bonds per month. So a year from now, the federal reserve will have bought $480 billion in MBS and $540 billion in 10-30 year bonds.

So basically, the federal reserve will try to spur growth by helping the mortgage market and the bond market. But there is a catch in the deal. What investors need to pay attention to is the yearly interest payment on the U.S. government debt.

As you can see, the interest payments on total U.S. debt (blue dots) follow the total U.S. public debt outstanding (red dots). The higher the U.S. debt, the higher the interest payments on this debt.

What will this mean for investors? Read it here.

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Eurobonds in Favor Against U.S. Bonds

In a previous article in March 2012 I pointed out that it was the perfect time to get out of U.S. bonds and go into eurobonds. Just recently we have a huge confirmation that the market is favoring European bonds (EU) over U.S. bonds (TLT) (Chart 1). We see that the WisdomTree Dreyfus Euro ETF (EU) has shot upwards on 21 August 2012 on news that the ECB would buy Italian and Spanish bonds. That day, the euro jumped to a seven-week peak against the U.S. dollar.

Chart 1: TLT Vs. EU

U.S. bonds yields have not kept pace (yields have not risen) with the rise of european bonds according to the correlation in Chart 1. So investors should quickly take action. Read more here.

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How Likely is QE3? 70% likely.

Ben Bernanke has been saving his ammo in the past months. Each time the fed meeting was held, markets were hoping for QE3, but they didn't receive any. This is evidence by the U.S. federal reserve balance sheet on Chart 1.

Chart 1: U.S. Federal Reserve Balance Sheet

Today, we have passed several months and we already see that the economy is starting to deteriorate. Not only in Europe and the emerging markets, but especially in the United States. In this article I will focus on the key macroeconomic data in the U.S.

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