Joker Burning Cash

Chart of the Day: Which Burning Currency Will Win? – Technical Analysis

King US Dollar has been much maligned – many are claiming that a pending Dollar crash is imminent. Hence, the race to purchase hard assets, even cryptocurrencies (another story, see more here). Is the King Dollar really set to implode?

When a currency implodes, it fosters a transfer of wealth from those holding the now worthless paper to those holding other currencies or tangible assets. The group-think of all the major central banks until just recently has been concreted into a global monetary policy favoring inflation in order to support economic growth. This monetary policy is now being challenged by rising prices, even at the same time economies are slowing. Learn more here.

To be clear, all major currencies are being debased. But this only tells part of the story. Some currencies are being more debased than others. So for those doing international transactions or involved in understanding trade relations between countries, it is more relevant to see which burning currency is winning or losing.

Often economists look at the US Dollar Index (chart: DXY) to judge how the Dollar is doing. The DXY is a weighted geometric mean of the Dollar’s value relative to the following select currencies:

  • Euro (EUR), 57.6% weight
  • Japanese yen (JPY) 13.6% weight
  • Pound sterling (GBP), 11.9% weight
  • Canadian dollar (CAD), 9.1% weight
  • Swedish krona (SEK), 4.2% weight
  • Swiss franc (CHF) 3.6% weight

So to understand how the Dollar is doing we should look at mostly how the Euro and Yen are doing. We will look at the technical analysis of these currencies later in this article.

The two key determinates of how a currency is doing are GDP and the Monetary Base of the currency regime of concern. Monetary Base can be grown or shrunk via Central Bank policy (amount of money printing, i.e., currency debasement) and government fiscal policy. In this article, we will focus on Central Bank policy. Below is a simplified formula to understand Money Value.

Money Value = GDP / Monetary Base

Looking at how the Euro is doing, what has the European Central Bank (ECB) been up to? Like many Central Banks, they have been purchasing assets and placing them on their balance sheets to prop up their economies. See their efforts in the chart below.

Euro Printing 2021 Q4

Given that Eurozone GDP growth is near zero, and the ECB has been growing its balance sheet as if there is no tomorrow, the Euro is on the back foot – using our Money Value formula. In the chart below, we see not only the ECB’s folly, we can also see the Central Bank of Japan (BoJ) is doing the same thing. Japan’s GDP growth is only 1%. With the current GDP growth in the US around 5% and less currency debasement than the ECB and BoJ, King Dollar is the current winner.

Central Bank Bond Holdings as a Percent of Issuance 2021

We can look at the same data as a percent of GDP in the chart below. Again, we can see that King Dollar is the winner. A few notes of interest are that trends show that the ECB is heading in the wrong direction and the JoB is in the ridiculous zone, though they have been there for several years now.

Central Bank Assest as a Percent of GDP 2018But, past performance is not an indication of future results. Besides, the above data has largely already been priced into the DXY. So, where do we go from here? Let’s take a technical analysis of the Euro and Yen to see if the King Dollar will stay king.

We have laid out two scenarios for both currencies. The choice of which scenario will largely be determined by the Federal Reserve (Fed) policy. With the poor GDP growth in the Eurozone and Japan, it is unlikely these Central Banks canit stop their current trends. Will the Fed hold the line and keep raising interest rates to stop inflation at the risk of a decline in GDP growth, or will they give in to political pressure and side with growth? Perhaps another government-induced panic (i.e., Ukraine or Covid 2.0) will force the hand of the Fed to change the currently stated policy.

For the Euro, see the below chart for these two scenarios – scenario #1, for now, seems the most likely. Euro is in a large downward flag – the breakout tends to go in the direction of the trend 60% of the time. The Euro has been banging on a floor near the 1.06 area – the more hits on this floor, the more likely it will eventually break.

EURUSD_2022-03For the Yen, see the below chart for these two scenarios – scenario #1, for now, seems the most likely. Yen is in a large upward flag – the breakout tends to go in the direction of the trend 60% of the time. The Yen has been banging on a ceiling near the 1.25 area – the more hits on this ceiling, the more likely it will eventually break.

If this seems similar to the Euro story, you would be correct (inverse calculation) – both indicate Dollar strength. These larger trends in multiple global DXY currencies tend to be similar because the US is the major player in the global currency markets. The interesting thing about the Yen is that it tends to be the canary in the coal mine and can give an early indication of which way the currency complex as a whole goes.

USDJPY_2022-03

For years, Japan and the Eurozone (mostly in the south), both mired in debt, have been on artificial support. Not only the size of the debt, but the quality of the debt, suggest a huge drop in the values of their currencies must occur. China is yet another part of this story – something for another post, but this can get you started – here and here.

Weakness in the Euro or even the Yen almost certainly will result in a stronger Dollar which could be the catalyst for a crisis in currencies issued by emerging market economies. In short, there is the potential to see such an incident over to the rest of the developed world and evolve into a global deleveraging event. Better translated – significant recession or even depression. What happens to the Dollar after this is another story.

This will most likely be seen as part of the Great Reset. Many of us have come to expect it will occur at some point. Promises will be broken, and rules will be rewritten as we go through the wash. There could be a massive transfer of wealth, with many people having their assets rinsed away as society gets put through the wringer. What Central Banks and governments do in terms of policy will largely dictate the way forward. No doubt it will affect geopolitics as well – Ukraine may be just the tip of the iceberg.

True capitalism could soon be history.

Like all money in history, all fiat currencies’ final value will be zero (aside from any numismatic value). But it could be a wild ride on both sides of the trade … 😉

The Right Wire Report does not provide investment advice. This post is for information only and is not a solicitation for you to buy or sell any financial asset.

See more Chart of the Day posts.

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 RWR original article syndication source.

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Written by Tom Williams

Born down on the farm in America's Midwest, my early life was spent climbing the ladder via a long career in information technology. Starting as a technician, and after earning a degree going to night school, I eventually found a place working at ATT Bell Laboratories as a software engineer.

Later moving into management and then a long stint in a major management consulting firm working with major banking, telecommunications, and retail companies. Working in various states in America, I also spent considerable time living and working in several European countries - currently expat in France. As a side career, I was heavily involved in real estate development and an avid futures trader. This experience can give one a unique view of the world.

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