sisse
++++VERY LONG FUNDAMENTAL POST ALERT ++++ ....recommend to check previous discussions to put it in context ...
Disliked{quote} AHA!! .... if ECB starts raising rates, the FED is already expected to raise rates two more times this year, it's still not clear which way for example EUR/USD will go. {quote}Ignored
Assuming no other variable in the equation (risk, macro shocks, war and now since populist are in control politicians too, etc) can you make a basic map so we can compare and contrast before and after the fact with the UBS profile.
Can we take a exhaustion leg 99.6x -> 104.3 -> 106.7x and max ext 109.0x. What about the other side in a quick further retrace to the 97.xx. What would it need to change to unlock further levels down and the continuation of the long term trend down?
Disliked{quote} So, clearly the leader (dollar) goes, and then follows the rest (Euro, etc.)Ignored
When you are talking about global and large currencies like Dollar and Euro one of the stronger component is always their own internal economic and monetary factors. Dollar obviously will lead a lot of softer currencies and those that are peg to the green but it wont trigger a change of macro policy alone in Yen or Euro etc.
Having said, you are getting at the core of the argument and one of the most basic principle in economics and free trade.
A currency (any currency) especially one as large and important like the dollar/euro cannot just have a big devaluation/revaluation without affecting competitiveness, trade flows and obviously forcing other countries to offset its own policy to avoid imbalances.
In simple words, artificial devaluations/appreciations or sharp disparities in monetary policies don't last long. Not only is a zero sum game in the long run but it destroy the core structures in the real economy.
2 current examples that will allow you to visualise this:
- The UK is devaluing its currency by the brexit shock but from this year onwards the government is pursuing to devaluing for gaining artificial competitive advantage with its trade with the rest of EU.
What would happen if its stay like this for artificial reasons not economic ones for a long time? ...not rocket science, the Euro will devalue against Sterling to offset the false competitive advantage ....that why I am betting on parity in EG in the mid and long term.
At the end both sides will offset each other with always a slightly 'less' worst effect towards the bigger side rather than the small in size but with a huge impact in inflation, less trade, less competitiveness and obviously the negative impact in the real economy.
- Now the US is announcing is going to the protectionist side (border tax, etc) trying to manipulate its currency for political reasons (including getting ride of the FED independence !!!). Even though the US is the largest economy in the world, if it goes against free trade and appreciating/devaluating Dollar for non economic reasons the rest of the world will be force to offset doing the same ....a race to the bottom ...
A tiny Banana Republic who is force to pay duties to export to the US, will be forced to devalue its currency to offset the lose and cut wages internal to keep exporting, etc etc ....making that country poorer and workers getting less while US consumers paying the bill in higher prices and smaller real wages, but because the devaluation, the countries next door and the other banana exporter in the world will be affected too, will follow through devaluing themselves, etc etc ...creating an endless vicious spiral (replace bananas with any other service or product) ...
While a large block, lets say the EU gets affected, and it will retaliate doing the same or devaluing or simple a stupid example allowing Samsung phones without duties while taxing Apple phones to offset the negative impact of a softer Dollar and/or protectionism, etc At the end the perceived benefits for the US will be get hammered from the other side (selling less phones to the largest richest market in the world), and viceversa (with BMW) for the other block ....making everybody ALWAYS worst off at the end.
That's why protectionism and artificial devaluation/appreciations don't work in the mid and long term. There is only a tiny margin of gains in the very short term for the first free rider but at the end it always ends in tears for everyone ...
Why I am telling you all that? ...because I am trying to give you one entry link from this part (monetary policy) to the real economy, commodities and stock markets so you can start exploring all the macro interrelation in context ....
sisee
