This week in Following the Auction, we’re looking at the trend in the dollar… now actually worth a buck and the trend in the euro… now actually worth a buck! (getting close) The dramatic result of this relatively recent currency change between the dollar and many currencies, but specifically between the dollar and the euro are evidenced by the explosion of articles and ads for European travel!
The top three speculative topics this week in global news were the rising dollar, the falling euro and the disappearance of Vladimir Putin. Putin turned up in Switzerland apparently to see his new baby daughter with Alina Kabaeva, the retired Olympic gymnast. Congrats Vlad, you dog. The other two most googled topics were the rising dollar and the falling euro. The euro has significantly broken it’s decade long support (1.20) as the dollar has broken its decade long resistance (1.00). This weeks dollar rally was fueled by increased expectations for an interest rate increase. The stronger dollar has huge impact on imports and exports and is in a state of constant fluctuation with the world’s most popular currencies in trend instead of balance. Arbitrage is the process of taking advantage of price-differences for the same item in different markets. Using a domestic hypothetical example, let’s look at coffee prices, variance, opportunities, and results over time. Please click graphic to enlarge.
In the example above we see the cheaper coffee from Seattle being sold in Boston taking advantage of the price-difference. Over time however the greater demand in Seattle allows prices to creep higher, meanwhile in Boston the increased supply brings down the price and somewhere in the middle the arbitrage opportunity is gone as the auction brings back equilibrium. Thinking about the dollar versus the euro, let’s substitute our domestic coffee example with international tourism. Now what happens?
While these two currencies may be close to parity, it’s nevertheless about the cheapest we’ve seen the euro since 2003, about a year after the Euro-zone common currency first started circulating. The monthly charts below show @DX vs @EX, the dollar vs the euro. Note the dollar off it’s lows hasn’t quite reached the 50% retracement from it’s highs. Note the euro off its highs has surpassed the 70% retracement from its lows.
Relative to stocks, someone buying European stocks today, if the dollar keeps gaining against the euro, those shares would be worth less after the price is converted to dollars, even if the price of the stock in euros hasn’t changed… meaning you can buy something cheap but unfortunately it could become cheaper! On the other hand… vacation season this year should be significant for Europe with huge pent-up demand for all of Europe’s major attractions. Helping us take advantage of these cheap prices might just be the multi-currency prepaid cash passport card, that allows you to load up to 5 different currencies on 1 card. So you can lock-in your rate each time you load your card. That’s smart trading!
What’s going to happen this week? Start it off with a bang and sign-up with MOM! Let Pat Tabet and Charles Cochrans’ pre-market commentary get you thinking… then let Lewis Borsellino fill your market day with trading talk and updates and … yes… some humor… via the ManOverMarket twitter feed. Come on’ get down with us!
As always trade smarter please, not more often!
ManOverMarket Blog 