Year End Roundup

Analisi Giornaliera - 25/12/2017

Weakening of US Dollar brings rising crude oil  and gold prices rising


The US dollar at the end of 2017 buys 13.26% less Euro and 9.32% less Yen than it did at the beginning of the year. The reasons for this are many and varied. President Trump and the differences between the perceptions of what he would/could do and what he can and did do. The US pulling up its drawbridge and adopting an exclusivist nationalism as opposed to the inclusive nationalism that drove US policy from the end of the second world war until the beginning of 2017. The withdrawal from the Paris Climate Accords. The withdrawal of the US from the Asia Pacific Trade Agreement. A retreat of US leadership on the world’s stage leaves uncertainty and a weaker US Dollar.


13.26% is a relatively large percentage move for a currency pair especially the pair of the two largest trading blocks in the world the US and the EU respectively. (In total size the order of the four largest blocks is: US $19.3 trillion, EU $18t, China $11.2t and Japan 8.9t.) What we see is that the US Dollar has weakened against all the Yen and the Euro on average by 11.2%. Beware speculation for “reasons” for why things happen in any capital market. There are as many “reasons” as there are traders and so “journalists” who don’t journalize fact anymore but merely aggregate the work of other “journalists” and regurgitate it (in other words they don’t dig information from data) will say, pseudo-knowingly, that the cause for a given effect is… Beware. What an intelligent person can say is that there are likely causes or possible and partial explanations for effects, but rarely singular reasons for complex events. Things that happen in a capital market are complex because there are so many participants with so many different ideas driving what they think and do. Therefore what we do know with absolute certainty is what the market did and when. The why may not be entirely clear. But, it is not necessary in order to profit. You see the trend, have a general idea of why it might be persisting for the time period under consideration and take a position on the continuation of the trend or its reversal. Not to oversimplify, but no need to complicate unnecessarily. The strengthening of the EUR against the USD is clear and present.



The decline of the USD against the JPY is less steep. Specifically 9.32% versus the 13.26% of the EUR. Does this mean that the Japanese economy is viewed as less strong than the European economy in US dollar terms. Hardly. In fact it likely means nothing at all relative to each other. Because the causal factors in economies this massive are myriad, we must get an understanding of them as individual, though very complex, but individual entities in and of themselves. Comparing them grossly, like which economy is stronger or weaker, like a gladiatorial contest is a waste of time. What we do say with certainty is that the Japanese currency, a proxy for the Japanese economy (similar to a stock being the proxy for a corporation) is stronger against the US dollar over the last year. Period. This is enough to have made a profit for most of the year on this trade and enough to make a reasonable prediction for the year ahead. The USDJPY chart shows the strengthening of the Yen against the dollar over the last year.



West Texas Intermediary, (WTI) is a commodity that is priced in US dollars, just like the Euro is in the EURUSD pair or the JPY is in the USDJPY pair. The gold “pair” is GOLDUSD. In other words the asset being compared with Gold is the US dollar.  As we saw in the above two cases the US dollar has undeniably weakened against two of its major trading partners’ currencies. Therefore a direct byproduct of this weakening is the INCREASE in the number of US dollars required to procure the same amount of another asset than was required before the weakening of the currency. And so, all things being equal (which they never are and so we must use the convention of stating that they are) the price of WTI in US dollars rose. There were indeed other reasons, like the restriction of output of the product by a worldwide cartel of producers in an attempt to increase price. Was there a definitive reason? No. But you can see the result of the market’s thinking and that is all we need to profit.



Similar to WTI, the price of the asset rose in some part due the weakening of the other side of the pair in which Gold is priced, USD. The gain in price is roughly in line with the gains of the other assets we discuss today. Namely 11.33% from the beginning of the year. What we can conclude from these observations is that these assets, being all priced in USD, have risen in value compared to the US dollar and were therefore good assets to buy, or take long positions in or buy CALL options in for this year. The question we want to consider on these days of introspection and practical dormancy in the capital markets is; will these trends persist? Assuming that the underlying thoughts of the markets driving the prices in the direction they take are sound (USD weakness against its trading partners) and that conditions are likely to persist (the all other things being equal bit), then yes they are likely to persist. But, be fully aware, very little in this world is likely to remain unchanged for long. Very little indeed.


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