PMI Suggesting Further Euro Strength

GDP growth in the U.S. was 0% the last quarter and that is consistent with the PMI going below 50 in the U.S. While the U.S. economy is deteriorating, the PMI in the eurozone is in a rising trend again and soon will catch up to the PMI of the U.S. Maybe we can even get a positive GDP growth in the eurozone at some point.

This trend is positive for the euro going forward. But we need to be aware that the ECB has some bullets left to devalue the euro soon...

Chart 1: PMI Eurozone Vs. PMI U.S.

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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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Euro Vs. USD: Take Two

5 months after I wrote the article about the Euro Vs. the USD, it looks like the USD has won the match against the euro. Since April 2012, the euro has lost 5% against the USD. Let's look at what has changed in those months.

Following list gives the most important indicators for the future of a currency:

• Current account balance of the country
• Total national debt of the country
• Inflation rate
• Interest rate

If the current account balance of the country is positive, a country will export more than it imports. As the population of the country exports more, they will receive more foreign money. This money will then be converted into their own currency, which is then spent or put in their banks. As the foreign money is converted into the money of the country's population their own currency will appreciate in value.

The larger the national debt of the country, the more expensive it will be to sell debt to foreigners. The government will then be obliged to monetize this debt to keep interest rates low and to be able to service this debt. Rising debt load will therefore devalue the currency.

The higher the inflation rate, the lower the currency will go. An example is Vietnam, where the dong lost much of its value due to high inflation.

When interest rates are lower than the inflation rate, there is no incentive for foreigners to buy the currency. There is no incentive to save money. The consequence is a lower currency value.

Let's look at the current statistics:

1) Current account
5 months ago, the current account deficit of the US was in the order of $US 110 billion per quarter, which amounted to $US 450 billion per year (2011).

For the Eurozone, the 12-month cumulated seasonally adjusted current account recorded a deficit of EUR 44.9 billion.

Today, the eurozone is posting a current account surplus of 14.9 billion euro in June, while the U.S. is increasing its quarterly deficits to $US 137 billion in the latest quarter.

So in this case, the eurozone is still the winner.

Europe VS USA: 1-0.

Euro Area Current Account (Million euro)

U.S. Current Account (Billion USD)

2) Total National Debt
Total US national debt is $US 16 trillion. Total eurozone national debt to GDP is 88.6%, the GDP is $US 17.578 trillion in 2011, which translates to $US 15.6 trillion in Eurozone debt. So again, Europe wins by a small margin.

Europe VS USA: 2-0

3) Inflation Rate
5 months ago, the inflation rate in the Eurozone was 2.6%, while the inflation rate in the U.S. was 2.9%. Today the inflation rate in the Eurozone is 2.4%, while the inflation rate in the U.S. is 1.4%. This is a significant and surprising decline in inflation rate in the U.S Vs. Europe.

Europe VS USA: 2-1.

Euro Area Inflation Rate

U.S. Inflation Rate

4) Interest Rate
5 months ago, the interest rate in the Eurozone was 1%, while the interest rate in the US was essentially zero. As we already know, Mario Draghi lowered interest rates to 0.75%, but this is still higher than the interest rate in the U.S. (0.25%). Europe VS USA: 3-1

Euro Area Interest Rate

U.S. Interest Rate

     

Conclusion: Europe still wins by 3-1 against the USA, but is losing ground through inflation. Though I think the current account surplus of Europe is the most important positive indicator of the strength of the euro in the future.

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Gold Price at Record Highs in Euro

Just a little update to tell everyone that gold is likely to reach an all time high today and possibly break out in the next months.

Chart 1: Gold Chart in Euro

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Euro Selling Has Stopped

The new numbers of the Currency Composition of Official Foreign Exchange Reserves (COFER) have been released and it shows that the the world has stopped selling euros (Table 1). Claims in euros have increased from $US 1.413 trillion to $US 1.423 trillion, an increase of 0.7%. Claims in U.S. dollars have increased from $US 3.513 trillion to $US 3.548 trillion, an increase of 1%. Interestingly, the increase in U.S. dollar claims is flattening out as compared to previous quarters, indicating U.S. dollar weakness.

In the previous three quarters, the claims in euros had been going down ($US 1.472 in Q2 2011 to $US 1.438 in Q3 2011 to $US 1.413 in Q4 2011). But that decline has stopped for now. I believe this reversal means that it's time to start buying into the euro again in the short term.

Table 1: Currency Composition of FOREX Reserves

To read the full analysis, go HERE.

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Swiss Government Bonds Spike

Swiss government bond yields dropped to a record -0.23% on 31 May 2012. There is no reason why 2 Year Swiss government bonds should have such low yields (chart 1), other than the fear that the euro will break up or the Swiss National Bank will de-peg against the euro.

Go HERE to read the full analysis.

Chart 1: Swiss Government Bonds 2 Year

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Gold again at François Hollande highs

I predicted already that the downtrend of gold in function of the euro was very odd. Everyone would assume that the "Hollande" effect would be beneficial to gold.

And today gold hit an all time high again, since François Hollande became president of France, as predicted...

If you're a U.S. citizen, your chance to buy gold is right now, as the euro is in oversold territory. 10 year U.S. government bonds are also overbought, with yields dropping 7% to 1.629%. Looks like a bubble to me.

Chart 1: Gold Price: Period after French Election

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Jim Rogers might sell the euro

It's amazing how the euro has outperformed gold since Hollande became president of France (Chart 1-4). It signals that there is a higher risk that Greece will not get their aid package. Euro global polls say that there is 50% chance that Greece will exit the Eurozone. If this were to happen it will be a deflationary collapse first, after which hyperinflation will occur.

Chart 1-4: Gold Price in Euros

During the second half of 2011 we even see that the euro is losing its secondary currency reserve status. The U.S. dollar is increasing its status as reserve currency (Table 1).

Table 1: Reserve Currency

Jim Rogers knows this and might sell the euro in the future.

As Europe is going to contract in 2012, Mario Draghi has signaled that further stimulus is on its way. 

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