Eurostat, the Statistical Office of the European Communities just informed that industrial new orders in the euro area (EA16) are down by 35.5 percent year-over-year and down 1 percent month-over-month. Excluding ships, railway, and aerospace equipment, for which changes tend to be more volatile, industrial new orders decreased by 0.9 percent month-over-month.
While looking at these awful numbers, I don’t think the euro should be where it is now against the dollar. That said, we have to admit that for now reflation trades have weakened the U.S. dollar.
But take care. Once the current economic recovery fails, which in my opinion will be the case, and investors start to understand we’re only seeing an inventory adjustment helped by expansionary conditions, the U.S. dollar will be back in play.
Real yields in the eurozone have moved up while money supply growth and credit have rolled over. In my opinion, the window of opportunity for risky assets in the eurozone to rally will definitively be closed for some time within the next couple of months.
Deflation and not inflation will determine currency valuations and the U.S. dollar will be king, notwithstanding the majority of people are convinced of the opposite is true. Once deflation is recognized as the real risk, all currencies will come under pressure.
Besides that, European banks’ balance sheets are sounding alarm bells — it really sounds like a carillon — and as banks fail to raise equity, credit will have to be tightened. The euro is ticking all the boxes for future weakness.
But, markets still seem to be overly preoccupied by a possible reemergence of inflation in the medium term caused by the Federal Reserve’s use of its non-conventional monetary policy approach.
In my opinion, the markets get it wrong and should better focus on the euro instead of the dollar. They are heading for a real surprise in the autumn when there is a great probability we will see the euro mowing down substantially against the U.S. dollar.
The current weakness of the dollar is clearly linked to the growing perception of coming inflation that which has had a negative effect on the value of U.S. debt assets. I really doubt that inflation is an issue for the western world for the next couple of years.
Of course I can be wrong, but if inflation is not the issue in the near term, then markets will have to be re-priced and we should expect this re-pricing to work in favor of the U.S. dollar.
So, investors shouldn’t sell their dollars too early. Have patience. I am still bearish on the euro and bullish on the dollar, at least for the time being.
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