vrijdag 27 december 2013

Euro surges against U.S. Dollar and Japanese Yen

As I predicted here and here, both the U.S. dollar and the Japanese yen are underperforming the euro. This is mainly because the central bank balance sheets of the U.S. and Japan are inflating, while the balance sheet of the Eurozone is shrinking/flatlined.

Central Bank Balance Sheet Expansion is Bad for the Currency

Moreover, we see that the Eurozone has a trade surplus while the U.S. and Japan have a trade deficit, which according to this correlation below, is good for the euro and bad for the U.S. dollar and Japanese yen.

Deficit is correlated to Currency Valuation
At this moment, if all things stay equal, the euro will continue its rise against the U.S. dollar and Japanese yen. An extra catalyst following the asset-quality review (AQR) is that the European banks need to increase capital next year and they will need to buy euros for that.

This also means that U.S. and Japanese bonds will continue their decline as following correlation between currency and bond yields suggests.

You see, this is the power of correlations... Maybe I should rename this blog to: "Correlation Economics".

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