The market reports over the last few days have contained a litany of dramatic and melancholic titles, expressing the volatile moves in two of the world’s default major currencies with phrases that are not for the feint hearted.
Diatribe such as ‘plummeting’, ‘precipice’, ‘wild ride’ and, remarkably, ‘whipsawed’, if that can even be considered a word, have dominated the headlines, however it is essential in such times of volatility to assess the circumstances as well as the real time facts and figures.
The recent propensity toward viewing the rapidly fluctuating value of the Euro against the Dollar as though it were an action thriller has not just been confined to traders, but also to FX industry participants, namely brokerages and their technology providers, prime brokers and risk managers.
Earlier this month Claus Nielsen, Head of Markets at Saxo Bank explained to LeapRate “we are in the middle of paradigm shift which will see more, rather than less, volatility in financial markets in general. In this new environment, it is important that risk models are dynamic enough to anticipate and react to changes in the risk profile of the underlying instrument and asset class.”
He was indeed most certainly correct.
The mainstream media’s focus on real time events, announcements and matters which are likely echoed by day traders of spot FX transactions has included announcements of quantitative easing measures by the all-but-bankrupt European Central Bank which is now committed to a 60 billion Euro per month asset buying (or white elephant buying) program until late 2016 at a time when Greece owes over 190 billion Euros in liability that came about from ill conceived bond investments which were secured against virtually worthless collateral.
Decision makers within the European Commission are largely unaccountable to an electorate, insofar as that a citizen of Great Britain cannot vote for or against pan-European policy which is made in Brussels, therefore paralyzing the sensibilities of those who wish to stem the downward direction of not only the Euro, but the economies of the entirety of the European Union’s member states.
This is why, in a week in which the Dollar, a currency which was tipped by many institutions at the end of 2014 to be the star of 2015, has also had its value affected following the Federal Reserve’s announcements this week causing the EURUSD to rally by 2%, is not a real matter for concern and should be viewed as a separate and totally sustainable default unit compared to the Euro.
The United States does not have entire regions with 57% youth unemployment and no use of, or export of, high technology. On the contrary, The entire North American continent from Mexico to Canada is producing not only vast amounts of high quality consumer goods – a trip to Northern Michigan or Southern Ontario would be a good indicator of the domestic motor industry’s return to success after the 2009 financial crisis that left Ford and General Motors in financial ruin.
Today, both firms are flourishing, producing a top quality range of products and exporting to, among many places, China.
Technological innovation is key to US industry, with Silicon Valley’s venture capital funds handing out vast investments to the largest number of innovative startups in the world, largely domestically located, backed up by a financial sector which spans the entire country and uses top of the range connectivity.
Thus, external debt for the entire United States is only 99% of GDP, which is low for a western nation and highly sustainable when bearing in mind the trade agreements around the world, as well as the outsourced manufacturing facilities owned and operated in the Far East by American companies which produce smartphones and other widespread consumer devices which are used by the entire world.
By contrast, Europe does not enjoy such a strong position. It has a vast central government and a central bank which is constantly in need of bailouts, whilst many of the member states remain on a continued line of dependency, which, after several years and several cash injections, should be testimony to the dynamic that Europe does not see a wish to resolve its uphill struggle via industry, but rather by monetary bailouts.
LeapRate recently demonstrated this clearly in a TV interview, showing the external debt of many major European nations. France has an external debt of 250% of its GDP, one of the highest in the world.
Ireland’s ten year property boom which turned those who tended the land into developers of luxury homes for sale at very high prices did not last, largely because it was an entire project funded by the central European government once Ireland joined the Eurozone, and there was no contingency plan in place, which resulted in a property price collapse because no industry or infrastructure was built to sustain life in the newly built luxury homes, so when the artificial funding ran out, so did the local economy, with many construction firms having gone into receivership and many young people having to seek a new life abroad due to the dire condition of the economy.
Meanwhile, China has an external debt of only 5% of its GDP, its state controls all business, and it exports to the entire world, whilst its vast workforce is highly industrious. The US economy has benefited from an element of this, however Europe by contrast has not. European Commissioners do not share the United States’ business-orientated methodology, instead favoring large government and state dependency.
This is clear when looking at the destination markets not just for online FX brokerages, but the entire online industry. Firms providing online services from Europe, and in the case of FX brokerages, Cyprus, the vast majority of their market focus is the Asia Pacific region and not neighboring European nations which share the same currency and have similar ethos. Instead, firms go to great lengths to adapt to suit the entirely different requirements of Far Eastern firms, whilst American companies continue to operate highly successfully from a domestic client base, including online firms not offering financial products and are allowed to sell globally.
When looking at these factors, which are ongoing and not the result of a sudden announcement but matters which will continue to make up the entire financial landscape of the nations whose currencies are traded against each other, it is ever clearer that the Dollar will long term remain strong, backed by an evergreen central bank, the Federal Reserve, stringent regulation, and a healthy economy by western standards.
The Euro, by contrast, is subject to completely the opposite circumstances, hence parity between the two currencies almost became a reality last week, and yet still might.
Chart courtesy of the Wall Street Journal, using information from Tullett Prebon