A popular view these days is that the euro is a failed experiment because economically and/or politically disparate countries cannot share a currency without eventually bringing on a major crisis. Another way of expressing this conventional wisdom is: a monetary union (a common currency) cannot work without a fiscal union (a common government). This is unadulterated hogwash. Many different countries in completely different parts of the world were able to successfully share the same money for centuries. The money was called gold.
Market insight: U.S. Dollar at 11-Year High Against Euro
And why now may not be the best time to bet on the greenback
Editor’s note: You’ll find a text version of this story below the video.
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On March 4, we spoke with Jim Martens, our Chief Currency Strategist. His Currency Pro Service is participating in our Pro Services Open House, a free week-long event that starts next Tuesday at elliottwave.com.
Elliott Wave International: Jim, it’s a good time to talk about currencies, because the euro has just touched an 11-year low against the dollar. Did you ever think you’d live to see this day?
Jim Martens: Did I ever think I’d live to see this moment… Well, back in mid-2011, when EURUSD was trading near $1.50, we started talking about the upcoming retest of $1.1876, the 2010 low. We were convinced that the rally from that level was a correction — so EURUSD would ultimately fall back to it. It took a while to get there because what followed was a wide-ranging sideways consolidation in EURUSD — a triangle, in Elliott wave terms, an overlapping pattern labeled ABCDE that you see on this chart:
That triangle ended in May 2014 with EURUSD almost hitting $1.40. From that point we had been expecting a move below $1.1876 — and we had lower targets, as well. Most of them have been hit, and the interesting thing is that now, all of a sudden, the idea of the dollar/euro parity is becoming popular. Someone at Goldman recently talked about parity by the end of 2017.
Elliott Wave International: Do you think we’ll see parity?
Jim Martens: Well, in 2008-2009, we spotted a three-wave rally in EURUSD from 2000 to 2009 — and we classified it as a correction. That, again, suggests that the euro will eventually revisit the lows we saw back in 2000:
But maybe not just yet. The current timing of the “parity” talk in the media is key. It’s interesting that we see it now, after a huge decline. This is very typical! At major turning points, sentiment is supposed to be extreme. There is a reason why extreme sentiment signals a turning point: First the trend gets popular, then it becomes too popular, then there is no one left to buy (or sell).
But the markets are doing what they are supposed to be doing: inflicting the most pain on the most number of people. The majority always gets caught on the wrong side at big reversals. Always. For me, the news of the public piling into a trend is another snapshot of the market sentiment. That’s useful information. Markets fool the most number of people at the most unexpected moments, but by tracking sentiment — and the news — you can prepare yourself.
The key is, just because the environment is right for a turn doesn’t mean there is evidence of the turn. Wave analysis has built-in indicators that give you that evidence, and you have to wait until you see it — before you act.
What separates Elliott wave fans from the rest of the public is that the public has no basis for determining when the trend may be over. In fact, the longer the trend continues, the more people join in — and the more committed they become. But right now is not the time to stay committed to your EURUSD shorts.
Elliott Wave International: Thank you for the insights, Jim.
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I continue to believe that the Swiss National Bank’s action on January 15 opened a “release valve” of sorts inside the world of the global “dollar.” Prior to that day, heightened bearishness all throughout dollar-denominated credit dominated trading. That included funding markets, especially eurodollars. The eurodollar curve itself ignored almost everything else, including the FOMC switch to “patience” in December, running quite dramatically and contrarily to any idea of an end to ZIRP.
NFTRH 323 ends the year in the same fashion as we began, calmly portraying what is in play within the market’s swings, laying out probabilities and honestly interpreting what the bigger trends are, without bias or emotion. NFTRH 323, out now!
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Guest Post by EWI
Forex vs. stocks: What’s “better” to trade?
As of 2013, the daily trading volume in foreign exchange was more than $5 TRILLION a day. EWI’s currencies expert, Jim Martens, discusses the pros and cons of trading forex vs. trading stocks.
Who is Jim Martens?
Jim is one of the very few forex Elliott wave instructors in the world, and a long-time editor of EWI’s forex-focused Currency Pro Service. A sought-after speaker, Jim has been successfully applying Elliott since the mid-1980s, including two years at the George Soros-affiliated hedge fund, Nexus Capital, Ltd.
Vadim Pokhlebkin: Jim, many readers of elliottwave.com tell us that they want to make money trading the markets. Would-be speculators have lots of options. Your area is forex — the market which has been growning by leaps and bounds. Can you explain why I’d want to look at forex and not, say, the more “traditional” stock trading?
Jim Martens: A few reasons are immediately obvious.
1. Liquidity. Currency markets are much larger than equity markets. By most estimates, the daily volume in forex is as much as 10 times larger than the combined volume of ALL of the world’s stock markets. That makes it a very liquid market.
Copper is bad and the XAD (a ‘commodity and resource’ currency) is worse. We have been following XAD’s test and loss of support in NFTRH for weeks. It is not a good sign for commodities.
XAD tried to bounce but the breakdown over the last couple of days dropped it to new lows. This is another chart that is similar to the HUI’s loss of the 375 neck line.
A Canadian subscriber requested a look at the ratio of CDW to USD due to a trip he is planning to the US. After doing the chart I thought I’d pop it up here as well.
Nominal Uncle Buck was in a clear Reverse Symmetrical Triangle from which it has turned down as expected. But I would say CDW-USD remains bearish pending the USD’s continuing correction as the intersection of the green and red dotted lines looks like a risk area, especially considering that it is in a confirmed downtrend.
What CDW-USD has going for it is a falling wedge, which can be watched as price gets to the 1.21 area. If it breaks the wedge, the commodity area and ‘inflation’ trade could get interesting. But right now, the CDW is in a downtrend vs. Uncle Buck.
While gold continues to offer no price protection (people who bought in say… 2003 or so might beg to differ ;-)) for weary casino refugees, it remains the value alternative to a gang of tramped out, played out and frankly, comical paper and digital notes issued by various governments.
These governments have been peddling little more than ‘trust’ since the macro play turned from productivity to a racket of ‘debt and confidence’ somewhere over the last couple or three decades.
For those who care, here is Uncle Buck’s latest status by daily chart.
A Reverse Symmetrical Triangle has formed, which is normally a reversal pattern, which would mean from up to down. But USD is at a strong support area and is over sold.
The weekly view shows Uncle Buck still on a bull signal by the cross of the EMA 10 (green) over the EMA 35. But the Euro broke out of a little topping pattern. Ultimate upside for the Euro is 142 if it remains bullish.
The rest of the motley crew is self-explanatory as shown on the chart. Per the chart breakout I bought the Yen via FXY on Monday’s hard pullback, which means I own something that is inverse to the speculative playground that stock bulls have enjoyed for too long now.
As for the commodity currencies of Australia and Canada, the chart says it all. Aussie especially must find support here or else.
Lots to talk about and talk about it we shall – in depth in the letter – and as the mood strikes out here. We are grinding out a change of character in the markets. I want you to remember the bull wise guys that were touting at the exact wrong time with their “it’s a new secular bull market!” and “it’s a GREAT ROTATION out of bonds and into stocks!” (well, they got it half right) bullshit.
Going forward, understand who the promoters are (incl. in the gold “community”) and who the ‘just want to get it right’ people are. These are difficult markets and anyone touting dogma or pretending to be a genius is going to get ground up. We are all subject to screw ups (my hand is raised) but it is a clear attitude and a willingness to admit you don’t know it all that will see you through the current environment where everything it seems, is in motion in a frenetic way.
US dollar analysis-turned-screed over.
(e) = external link
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Fortress of Lies James Howard Kunstler 3.12.13
The Freedom of Money Bill Bonner 3.12.13
The US Economy: Afloat on Cheap Money Investment Contrarians 3.12.13
Gold Chart of the Week Brian Booth 3.12.13 (e)
Fantasyland for Policymakers Steve Saville 3.12.13 (pdf)
Gold & Silver Traders Reduce Long Positions Again GoldCore 3.12.13
Food Stamps Hit Record Alongside Record Dow Jones… Zero Hedge 3.12.13 (e)
Historical S&P 500 Sector Weightings B.I.G. 3.12.13 (e)