The Great Currency Wars of 2015

by Turd Ferguson, TF Metals Report

The new year begins with dysfunction and dislocation across nearly all major currencies. That gold and silver are holding up…though still hard capped at $1200…indicates that the physical supply breakage that we first discovered back in November continues to dominate the picture.

But let’s start today with the currencies as we continue to see historic value swings. Recall that Raoul Pal warned everyone that stuff begins to really unravel at “a DXY above 90″. Hmmm. What do we have today? I have a last of 91.48. Now, lest you think this is all dollar strength, let me remind you that the POSX is nothing but an index that compares The Pig to a basket of other fiat currencies. So, when the USDX (DXY or POSX, whichever you prefer) is rallying, it is primarily due to weakness in the other currencies.

reserve currency pie chart

As you can see, the makeup of the index is not evenly split among the fiat and the euro makes up more than 50%. And when you add in a euro-pegged Swiss Franc, the weighting exceeds 60%! So, when the euro declines, it has a rather significant, inverse effect on “the dollar”.

And, boy-oh-boy, is the euro ever declining!! Here’s a chart of just the past six months:

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This decline can be attributed to a number of reasons but the most recent plunge is clearly related to the events of Dec 16-18. What happened then:

So, to me, it’s quite clear that the “market” is anticipating the long-awaited ECBQE at the next ECB meeting and the euro is selling off dramatically because of it. Oh, there are certainly other factors in play here but, in the end, we must expect further euro weakness until January 22. What happens next will all be based upon whether or not the ECB begins the overt printing.

IF the euro starts breaking down through 117 and 116, ALL BETS ARE OFF and it’s going to head considerably lower.

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And, as stated above, with the euro holding a 60% basis of the POSX, that index is going considerably higher. How much higher? You tell me! If it takes out that 2005 high of 92.63, it looks like it could make a move on 100! And what did Raoul Pal say about DXY 90???

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One last thing before we get to the metals…we have to mention crude. WOW! For weeks, we’ve been talking about the possibility of it going to $50 and here we are! I have a last of $50.53 and a low of $50.30. If crude closes below that January 2007 low of $49.90, especially on a weekly or monthly basis, it’s impossible NOT to think it’s headed to $40. $40!!

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Given the potential ugliness of all of this, I guess it’s not surprising that the S&P is down 30 points and the bond market is soaring. I have a last in the 10-year of just 2.06% and the 30-year Long Bond is 2.62%. It’s certainly nice to see the metals get a “safe haven” bid as well but I remain convinced that there’s much more going on here than meets the eye.

Recall that gold reversed of off the $1150 area back in November when the GOFO rates suddenly plunged to historically negative levels. Silver also seemed to find a physical floor at/near $15.50. And now gold refuses to go lower with the euro and the yen and if silver was still tracking crude, it’d be under $14.

However, a significant effort continues to be made to keep gold under $1200. Note the red line at $1200 and the red arrows pointing at the sharp down moves back and away from that level. Therefore, our primary short-term goal is simply a close above $1200. After that, a close above $1210. IF we can accomplish that, we can set our sights on slowly gathering momentum through $1220 and then $1240.

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And there’s a real battle in silver between $15.50 and $16.30. Which way this ultimately breaks will clearly set the tone for the early parts of this year. Given the firmness of the floor at $15.50, I very much like our chances of a break out and UP. However, given the infinite nonsense of paper silver, who can say for sure? However, if I’m right and a 2015 rally develops from here, we’ll look back on the area in the blue rectangle and recall it as a pretty stout bottom.

TF

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