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Crisis

Why isn't the Euro weaker?It could be said that it is slightly strange that the Euro isn't weaker. As of writing, EURUSD is trading at 1.1040 after seeing lows of 1.0458 back in February 2015. From March last year until February this year, EURUSD was in a very steep downtrend with a range of ~3500 pips. Since then, the pair has remained relatively stagnant, after seeing a bounce off of the 1.0460 level. With the Greek situation weighing and another round of Quantitative Easing, you probably would have thought that the Euro would have been much weaker. However that is not the case, evidently. We have 3 fundamental beliefs with regards to this. 1) The market has been poised for a US rate hike for a while. However, to justify a rate hike, consistently strong data has to be printed, but the US has not been able to achieve this as of yet. Combined with this, short term rate differentials would in fact suggest that EURUSD should be above current levels, as well as inflation expectations. These correlations are slightly weak, however. 2) Uncertainty in Greece is causing indecisiveness. Investors do not actually know how Greece will leave the Eurozone, as it has never been done before and there is no real procedure for a country to leave. On the flip side, Tsipras has suggested an extra EUR 60bn to be provided to Greece for the next 3 years. This seems like it would not solve the underlying problem and merely extend the time it takes to pay their creditors. Investors are aware of this. This uncertainty could be causing the lack of Euro weakness. If and when a deal is reached, a rally and fade could most probably occur (i.e a spike in price and then a fall). A good quote for why this situation is taking so long to resolve: 'if you owe the bank £500 it's your problem; if you owe the bank £5m it's their problem.' 3) Many people believed that the Eurozone would be like Japan in terms of reintroducing QE (deflation and QE for a long period of time). However, investors began unwinding short positions when they saw that Eurozone data was actually improving post-QE introduction. This lead to an increase in the price of the Euro which is still having an effect today. Please add comments. If you agree or disagree, I'd really like to hear it. www.admiralmarkets.com Follow us on Twitter: @AdmiralMarkets
by DavidBelleFX
10
Next Fin. Crisis?It's been more than 6 years since the last major financial crisis occured in 2008. If we assume financial crisis come out almost perodically in every 8 - 10 years then I think it's time to start thinking whether we are close to the next one. 10Y US treasury notes have always been preferred investment tool for non-risk takers regardless to the financial environment. But what about 2Yr treasury bonds? Can it tell us tell of something different? So I looked at how the spread between 10Y and 2Y notes changes. I took the difference of 10Y and 2Y note yields (drawn in blue line) and looked how it changes with time. I marked with green circles where the spread is equal to 0 (10Y yield = 2Y yield) First 1990, second (little one) 1998, third 2000, fourth 2007. I'm sure you're very familiar with these years:) Before every major crisis 2Y note yield became equal to 10Y note yield. Why? Because smart money managers see the uncertainty and the approaching crisis in the market and move their money from short term bonds. Up to this point maybe that was what you heard before. But can we predict the next crisis time? So when I drew 2Y note yield (red line), I noticed the 2Y note yields at the time of crisis are decreasing linear starting with 9,55% in 1990 and ending with 4,92% in 2007. (the green descending trend line) This confirms today's ongoing deflationary markets in all over the world. If we assume the trend will continue as it is, 3 - 3,5% would be most probably the next 2Y treasury note yield at the time of the next financial crisis. If we look at the FED rate history, we see the fund rate is pretty similar to the 2Y note yield. So did you recall the FED fund rate projections for the next years?? Most of the FED members project the fund rate will be around 3,5% at the end of 2017. Bingo! And also in 2017 we will have had 9 years after the last financial crisis. Be careful in 2017 if the spread of 10Y and 2Y notes yields close to each other.. www.federalreserve.gov
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by REDRUNNER73