Starting right around October and driven by the Fed QE3 announcement, the dollar went into a lovely spiral that culminated in a EUR/USD exchange rate of 1.35. This brought a boon to US equity markets as business picked up, cheap dollars flooded debt markets and foreign capital found it had easier entrance.
However, the sustainability of the trend was always suspect, as witnessed first by Japanese retaliation and now by the reminder that Europe is built on a cracked foundation. EUO is preparing to correct the entire last five months of movement and the US advantage in trade is about to be eliminated. The Fed has once again been checked, this time by foreign currency markets (the last time was by the commodity markets).
Play close attention to the euro here. If it should follow through on the break down that would mark the top of this rally. I have long said that euro parity is an inevitability and with the latest bout of clowning that is being witnessed, I’m guessing that time is drawing nigh. Recall that I also said months ago this rally would be derailed by the EU crisis resuming.
Much of the uptick of economic data was built on those lower currency swaps. While the housing markets subsist on witnessed improvement, the question arises as to how the currency and housing markets are interlocked? The euro can erode the equity run and if the equity run erodes, will that impact homesteading?
The EURUSD thus threatens to create a major disappointment for investors and I see it leading us to the correction I offhandedly guessed at last Fall. The start of Spring is at hand, and it will be déjà vu.