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FUNDAMENTAL ANALYSIS

EURUSD to Break a 50 Year Average

EURUSD, to Break, 50 Year Average, ECB, deposit rate, Fundamental Analysis, Analysis, fx trader, forex

11 May 2015

When the ECB cut the Deposit rate for a second time September 2014 to negative 0.20 from positive 0.10, the EUR/USD price was located at about 1.3179 and at that juncture, it already broke the 5 and 10 year averages in the 1.3200 and 1.3300's. December 2014, the EUR/USD would travel further to break below the 14 and 16 year averages at 1.2550 and 1.2235. But January 2015 was the big month for the Euro as its descent would see every average break from 16 to 62 years. Viewed in this context, one would understand why the EUR/USD lacked any meaningful correction.

The current EUR/USD price trades around its 60 and 61.6 year averages at 1.1102 and 1.1119. Both averages encompass 720 and 740 months of data and dates to 1953. The EUR/USD exchange rates are theoretical yet accurate because they were derived from Deutschmark exchange rates iterated from the XEU basket into ECU units. Not only is the 60 and 61 year averages resistance towards any EUR/USD recovery higher but the 55 and 50 year averages are located at 1.1214 and 1.1372. Factor into the equation the historic mid point from the 1.5769 highs to the 0.6535 lows at 1.1152, the 1.1095 mid point of the 1st and 3rd Quartile, the geometric mean at 1.0966, the 62 year Median at 1.0863 and the EUR/USD is in a massive downtrend that could possibly last for years. Its not necessarily a Fed Funds hike that would lend impetus to the downtrend although that would assist but the EUR/USD from the 62 year perspective by itself is at its historic statistical price peak. Its not the averages alone, the EUR/USD from a curve perspective is at the top of the peak.

For a currency price to break a 50 year average is quite unnatural in modern day currency markets and possibly a development rarely, if ever, seen historically. Editorially, a 50 year average break is my first experience and not seen in all my research and trading years. Typically in the best of volatile markets, currency prices trade between 1 and at the most 35 -40 year averages although 40 is quite a price stretch and extraordinary. What lends credence to such an historic break is the factor of the negative deposit rate which in itself is quite rare yet it was known and planned by the ECB based on an early 1900's German economist by the name of Silvio Gesell, a German by name who resided in Argentina, retired in Switzerland, was ripped apart by Keynes in the General Theory but recognized and praised by Irving Fisher.

Under current account surpluses at Euro 20 billion February V 19.5 billion January and 7.5 billion February 2014, the only manner for the ECB to experience a lower exchange rate was to go negative on the deposit rate since surpluses held the deposit rate in positive territory. If ever that rate approached negative, it was rescued by the ECB but the EUR/USD price was also redeemed. By going negative, the ECB was able to channel money away from paying negative interest to banks excess reserves and force bank to bank lending in the private market. The negative deposit rate was the catalyst that saw the EUR/USD crash through all its major averages in a 3473 pip run in 12 months and a break of its 10 month historic trend average. Factored as a whole, the trend however is only 7 months old or 167 days if calculated from the September interest rate drop and a 740 pip per year average drop since the 2008 crash factored from the 1.57 highs.

Not only is the lower exchange rate the target but economically GDP must be the first focus and not CPI. From  a Keynesian perspective and viewed from the old IS/LM equilibrium Models, the antecedent to Taylor Rules, the lower the interest and exchange rate, the higher goes GDP as the equilibrium curve shifts. Since the September announcement to lower the deposit rate to negative, GDP has held steady between 0.2 and current 0.3 but hasn't been negative since Q1 2013 yet 0.3 is consistent with its long run average at 0.35. Household expenditures contributed 0.2% Q4 2014 yet Spain and Germany were both the only contributing factors at 0.7 each and France 0.1 against the vast majority of negative for the remainder of European nations. Without Spain and Germany's collaboration, GDP could've been much lower. Viewed annually, GDP 0.3 is well below its yearly growth rate of 0.9 yet barely above its historic mean since 2000. Since 2008, GDP annualized spent a vast majority of its life in negative territory. 

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