Currencies - Long term forecast
by Geir Solem. December 15, 2009Print
We begin by looking at USD intermediate and long term price patterns as well as Dollar's relationship to EURO, British Pound and Yen. We'll also look at EURO and EURO/British Pound relationship using Elliott Wave Theory.
Elliott Wave Theory is based on the psychology of the masses which forms patterns. I use these patterns as well as the general sentiment in my forecasting. In addition, I take into consideration the behaviour of the commercial traders.
The USD is at a cross roads relative to other major currencies. There is a serious crisis developing in Eastern Europe and in some Western European countries.
Interesting structures are revealed looking at charts spanning decades. These structures give an idea about the future of USD and other major currencies. A major structural turn is in progress for the USD index revealed by the 30 year chart. In addition, the USD relative to the Yen is at an important junction completing a soon 30 year old structure.
All charts in this article courtesy of Stockcharts.com. The USD on a daily chart over a one year period:
Notice that the commercials have been net long over the last few months positioning themselves for a rally in USD
USD looks like it has completed a "B" wave correction. This structure is sub dived into a,b and c waves on the chart labelled with blue capital letters. You can see that the ending wave includes an extended 5th wave.
A larger "C" wave rally is in its early stages which should last a year or more.
Sentiment towards USD
The sentiment in the last few months has been extremely negative towards USD. Some sentiment surveys are showing 97% bearish on the currency and only 3% bullish. Also the public media has displayed a very negative sentiment towards USD with newspaper headlines and magazine covers dooming and trashing the currency. The conclusion is that the trend is exhausted.
Many countries are calling for a new global currency to replace the USD including China and Russia. The last attempt to abolish USD was in the South American Mercosur trade organization. In the Common Market Council meeting in Montevideo this month, government authorities of Uruguay and Brazil agreed on bilateral trade using local currencies. This has already been in practise between Brazil and Argentina. Governments and states are usually the last to act on a trend so this is another sign that the trend is exhausted.
This kind of extremely negative sentiment lends support to a large major USD rally.
A historical view of USD
Multi year monthly chart of USD spanning decades.
See the blue line that illustrates the potential future path of the USD.
I have identified a large multi decade long triangle in USD which I think is a large wave "B". As you can see a wave "d" (in blue colour) of the triangle is currently in progress. I have labeled the internal structure of the "d" with "a,b" and "c" in black colour. The first "a" and "b" has been completed and the USD is approaching the last wave "c" which will complete the larger "d" of the triangle.
The triangle began in the early 1980's and looks like it will be completed in a couple of years.
When the "B" wave triangle is completed the next trend should be a gigantic rise in a wave "C" spanning multi years and possibly more than a decade.
USD/GBP cross rate
USD/GBP has completed a "B" wave and is turning up in a wave "C". USD should rally strongly against the GBP for more than a year. The full strength USD relative to the GBP should be evident over the next few months when the new trend picks up force.
USD/EURO cross rate
USD is also turning up relative to EURO. A "B" wave is completed in the USD/EURO cross rate. The USD should rally strongly for more than a year against the EURO.
Historical USD/YEN cross rate
The above long term chart reveals an interesting structure spanning nearly 3 decades. Within the last 30 years you can count a complete 5 wave structure down for the USD/YEN ratio.
An alternate count would be that the last 5th wave down (labeled in black colours) sub divide into a larger 5th wave, this would then be the first wave of the 5th wave down. The coming rally is just a wave 2 correction up before the decline continue. The downside is limited in this scenario.
Main scenario: USD is initiating a multi decade long rise against the Yen.
The above chart shows that EURO has completed an 8 year rally in a relatively clear 5 wave pattern which ended in 2008. This was followed by a corrective decline in an "a" wave into late 2008. Finally a "b" wave counter trend rally took place which has just been completed.
EURO is in the early stages of a multi month decline in a wave "c" that should last more than a year.
Euro/GBP cross rate
EURO is nearly completing a year long 4th wave correction against GBP. The next should be a rise in a 5th wave that should last years.
The rise of USD has implications - economic collapse in Eastern Europe ?
Banks in Europe have strong exposure both to defaults on real estate loans and commercial loans. The next crisis is most likely to arise from Europe which could then spread across the world. Europe has long term declining demographics and high export exposure much like Japan. However, Japan has already deleveraged during the past two decades, so the new crisis is unlikely to start from there. Defaults have been growing on loans from European banks to Eastern Europe during the last few years according to data from the European Central bank.
Ukraine is trying to raise its minimum salary and pension of approx. USD 80 by 20%, this is in conflict with the International Monetary Fund. IMF could refuse to provide further loans since the politicians are not able to get the ballooning state deficit under control. The wage and pension rises are jeopardizing the release of the next $3.8 billion tranche of an IMF bailout package. Further financial help from the European Union and others could also be denied.
In fall 2008 IMF approved a loan of $16.4 billion to Ukraine of which $11.00 billion has already been handed out. This loan has kept the distressed banks floating and has supported Ukraine's currency.
A rise in USD could possibly create waves of bankruptcies in Ukraine's banks. The reason is that 70 percent of the mortgage loans are denominated in US dollars. The bankruptcies could create a domino effect across Eastern Europe and threaten the solvency of European banks which own about a third of the Ukrainian banking system. The default on Ukraine's state debt is imminent.
Furthermore, there are emerging debt problems in Greece, Spain, Irland and Italy.
The conclusion of the analysis is that the only safe haven is the USD which should rise strongly, well into 2011. The other currencies will all fall , some more than others, including the Swiss Franc. Some national currencies may collapse completely like the national currency of Ukraine, the hryvnia.
Trading vehicle for the USD
If you want to trade USD you could use the UUP (Ticker) which is a trading vehicle for the USD and simulates this currency.
The same pattern as in USD is evident in the UUP. Notice the strong volume during the last few weeks. A long term bottom is in place for the UUP.
There are also leveraged vehicles to trade USD like the RYSBX (Ticker) which is leveraged twice the USD.
© 2009 Geir Solem
Geir Solem is the president and founder of ElliottWaveTechnician which is a forecasting service based on economical cycles, demographics and Elliott Wave theory. He is also the president of Cornupia Capital Ltd. a financial advisory service in mergers & acquisitions, offshore structures, corporate restructuring and takeover defense.