A couple days ago, I had promised to post a chart with “enormous long-term relevance.” Given all of the rumors of a potential Euro break-up swirling in the media this weekend (including Paul Krugman’s controversial piece that made big headlines in Spain), today seems like the right day to introduce this chart.
It’s a simple chart, but fraught with consequences. It’s the chart of the Euro versus the U.S. Dollar since 1975:
Since the Euro was only announced in 1999, the chart is constructed prior to that date by using the fixed amounts of the currencies that made up the Euro. I’ve added the horizontal red line to denote the mid-point of the 37 year range.
This chart completely astounds me. Absolutely amazes me. As I type, I can still hardly believe that the Euro is trading in the top half of its 37 year range, and I’ve looked at this chart maybe 20 times before. It’s actually 16 big figures above the mid-point! Much closer to its recent all-time high than even its recent low from 10 years ago.
Why do I bring this chart up? It’s probably because I’ve been personally shorting the Euro for many, many months, and it still seems much too rich to me. It could go down to 1.20, and I still would not be able to bring myself to cover. 16 big figures above the mid-point!
As I’ve said before, I like to look to price action for my clues ahead of any research, or market commentary, or punditry I read. And in the case of the Euro versus the Dollar, there are so many different forces that act on the currency positively and negatively, that change course within months, forces that I’ll never be able to observe or measure. So I prefer to focus on this chart, the obvious, enormous debt problems, and the inevitability of political distress. And this simple chart tells me that the Euro is much, much too high.