Since it started back in April 2010, when it was discovered that Goldman Sachs (and its friends) had helped Greece hide its fiscal nakedness, the euro crisis has lurched from Greece to Ireland to Greece to Portugal to Ireland to Greece to Spain to Portugal to Ireland to Greece to Italy to Spain to Greece to Portugal to France to Spain to Greece, rather like a special Euro Collapse Cup, with referees from Germany and Switzerland.
The Swiss, practical as ever and unable to bear the blood on the field, which was threatening their own pristine environs, blew the whistle first, when, on September 6, the Swiss National Bank drew a line at 1.20 to the euro and dared the philistines to cross.
The Germans, correct as ever, remained on the field under more or less continuous battering from every side, until, on September 15, they, together with their alarmed partners – the Americans, the Japanese and the Brits – put their monetary bodies on the field in an attempt to stanch, even if temporarily, the blood flow.
And, at least as first pass, the referees appear to have got the measure of the madness.
Equities, particularly bank shares, have risen in sharp relief, and gold, long the only haven anyone could see, has eased back to a still outrageously high $1750+ an ounce. Emerging market equities and currencies have also taken a breath, as have most commodities and the euro.
Happily, the Australian dollar, while a tad stronger, is still below the long-term resistance of 1.0450, confirming my gut feel that parity for the Aussie and US dollars makes no sense whatever.
In fact, I can trace the start of my (US) dollar bullishness to February of this year, when the dollar fell – and stayed – below 1 Aussie. Now, I’ve never been to Australia, but I do have two lovely sisters-in-law (plus families) there – yes, yes, I’m coming – so this is not mindless prejudice. Rather, I believe that the extravagant run-up in commodities (and commodity currencies) is as much a side-effect of the grotesque monetary (and fiscal) efforts of the developed world to keep themselves meaningful in the New World, as it is of a real supply/demand imbalance.
And I believed that the crossing of the 1 Aussie dollar barrier signalled that the dollar’s nearly 10-year decline had gone too far for common sense. It was time for the dollar to turn.
Well, markets have a way of making you look like a fool, before coming to your rescue, and sure enough, the dollar index – in the exact reverse of my view – started falling, from around 77 in February to as low as 73 in May. It continued to bounce along the bottom till this month, when it turned back and is, once again at around 77.
Remember though, that in February I believed – as I still do – that 77 was too low. I note that the euro is back at the 1.37 level it held in February, and most major currencies are weaker than they were at that time. Commodities are a mixed bag – the CRB index is up by three per cent, while copper is down a huge 12 per cent. Oil is up (again, 12 per cent), probably driven by the Libyan crisis; and gold, despite its recent shudders, is up a gilded 30 per cent.
The Allahoakbar rally in gold was, of course, driven by watching the Euro Collapse Cup, on the one hand, and the litany of woes in the US – flailing growth, unemployment, budget standoff, S&P downgrade – on the other. However, now that the referees have called time in the Euro Collapse Cup, I believe markets will revert to more reasonable behaviour, with a stronger dollar driving prices in this next phase of life. There may be one more bounce in gold – Diwali is around the corner – but after that, I see it falling towards $1,600 an ounce.
The euro will likely continue to burn slowly – there will certainly be a few (or several) more rounds of the Euro Collapse Cup to be played – with virtually unlimited downside over the medium term, as a much weaker euro may well be the only way out of the euromess, since it would provide the peripheral economies some kind of competitiveness boost, which could make the fiscal pain a bit bearable.
The rupee — well, the prognosis is not that bad. I believe the recent run down to 48 was driven, to a large extent, by the heavily short dollar positioning in the market. With the market still short, anything can happen.