FX 20140909

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FX CONCEPTS FX CONCEPTS

GLOBAL MACRO RESEARCH
To contact FX CONCEPTS New York: 1 (347) 846-0087, 1 (347) 846-0097 or 1 (347) 846-0103. mbryan@fxconceptsnews.com
CURRENCIES INTEREST RATES EQUITIES COMMODITIES

WEEKLY INDEX

MARKET INSIGHT REPORT............................................................. 2
The Future of the Eurozone ....................................................... 2

CURRENCY Europe Long-Term View.......................................... 3
Somewhere Over the Horizon.................................................... 3

COMMODITIES Long-Term View.................................................. 4
The Commodity Boom Is Over .................................................. 4

CURRENCY Commodity Currencies Long-Term View............... 5
The Kiwi Clips its Own Wings.................................................... 5

Under no circumstances should any material in this newsletter be used or considered as an offer to sell or a solicitation of any offer to
buy an interest in any security or investment managed by FX Concepts or its affiliates or any other product or service to any person in
any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the laws of such jurisdiction. Access to
information about specific products are limited to investors who, among other requirements, either qualify as "accredited investors"
within the meaning of the Securities Act of 1933, as amended, or who meet any other eligibility and investment requirements and
generally are sophisticated in financial matters, such that they are capable of evaluating the merits and risks of prospective
investments.
September 11, 2014

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MARKET INSIGHT REPORT
The Future of the Eurozone
September 11, 2014
By John R. Taylor, Jr.
Chief Investment Officer

We often see the statement that the recent troubles of the Eurozone are not at all significant, as
the monetary block has been pulled back from the serious problems that threatened its future in
the years between early-2010 and mid-2012. On its surface that sounds reasonable, but thinking
for a few minutes and examining some economic, monetary, and social statistics over the last
five years points out the deeper underlying realities that have done nothing but worsen over time
and in some areas dramatically so. If the underlying numbers are so much worse, how can we
say the Eurozone is not in worse shape than it was in late 2011 or in the first half of 2012, when
most would argue the outlook was the most pessimistic? Back then I wrote a chapter, What
History Tells Us about the Euros Future for Sara Eisens book Currencies after the Crash. My
piece focused on the social and political differences among the countries, as well as the longer-
term population issue. The status of every one of the issues, which I raised at that time, has not
improved. The underlying problem is not liquidity, as it is only a symptom of the reality of the
systems beneath it, but the nature of the political economy of each society within the Eurozone.
As politics is the art of the possible one cant ignore that what is possible in any country derives
from the social and economic realities of the society involved. What politicians can do and
expect from the voters of Germany is far different from what is politically possible in Italy or
Greece. The social milieu of each individual country has not changed and no effort is made to
harmonize them, a process that would take generations. And the critical economic statistics still
deteriorate: lower growth, higher government debt levels, continuing deficit financing, declining
internal trade within the Eurozone, and increasingly disparate growth statistics. The situation is
worse than it ever was.

What will the future bring? The ECB, the only Eurozone central authority, has decided that the
strong euro has had a negative impact on inflation and growth on the one hand, and wants to
stimulate bank lending to the private sector on the other, so has gone to negative deposit rates.
By penalizing banks with excess liquidity, the ECB has made the euro hard to hold. The euro is
declining. That is it and there is no question about it, but when will it stop? Who will stop it? The
most likely candidate to put an end to this decline is the United States acting through the G-7,
and we dont expect that to happen until the EUR/USD is approaching par and dragging down all
other currencies against the dollar as well. This will have a positive impact on Eurozone exports
and import substitution and will stop the slide to deflation. It will bring the US closer to deflation,
and force other currencies to protect themselves from deflation and trade deficits by driving their
currencies lower as well. Unfortunately, without a better capitalized banking system, which is
hemmed in further by the AQR and Basel III rules, this devaluation of the euro will be very slow
to translate into growth. Because, of the four largest economies, only Spain showed positive
growth, and all economic numbers are already pointing to a weaker second half of the year, we
believe the next year will start off in recession. As the rest of the world should be doing well, the
Eurozone will lift itself up through the current account once again, but this is no way to manage a
developed economy penalizing your citizens and exporting all you can. Politic tempers
deteriorate in a situation like this. Luckily there are few big elections, only Spain in December,
but the extreme parties and press will increase their calls for change. Life will get meaner on
both sides of the Alps.

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CURRENCY Europe Long-Term View

Somewhere Over the Horizon
By Joseph Palmisano

What started more than four years ago as a
banking and sovereign debt crisis has
decayed into a growth crisis that is now
enveloping the three biggest economies.
Germany is teetering on the edge of recession,
France is mired in stagnation, and Italys GDP
is barely above its level when the single
currency came in 15 years ago. Since these
three countries account for two-thirds of
Eurozone GDP, growth in places like Spain
and the Netherlands cannot make up for their
torpor. Not surprisingly, investors are getting
out while they still can. The money that flowed
into European equities at the start of the year, when there was a widespread view that the
continent was finally starting to recover, has fled over the summer. Its not a region anyone
wants to invest in anymore.

The underlying causes of Europes new ills are three very familiar and interrelated problems.
First, there is a shortage of political leaders with the courage and conviction to push through
structural reforms to improve competitiveness and, eventually, reignite growth. The big countries
have wasted the two years bought by Draghis whatever it takes commitment. Second, public
opinion is not convinced of the urgent need for deep and radical changes. Third, despite Draghis
efforts, the monetary and fiscal framework is too tight, throttling growth, which makes structural
reforms harder.

At the same time, the political outlook just keeps getting worse. In the German region of
Saxony, the anti-euro Alternative for Germany (AfD) party recently won it first seats in a regional
assembly. French Prime Minister Manuel Valls faces a battle to push through even the modest
reforms he has proposed. And Italys young reformist PM Matteo Renzi will soon see his
popularity slide if he cannot deliver growth. Without a new push from the continents leaders,
growth will not revive and deflation will take hold. Japan suffered a decade of lost growth in the
1990s, and is still struggling. But, unlike Japan, Europe is not a single cohesive country. If the
currency union brings nothing but stagnation, joblessness and deflation, then some people will
eventually vote to leave the euro. Thanks to Draghis promise to put a floor under government
debt, the market risk that financial pressures could trigger a breakup has receded for now - but
the political risk that one or more countries decide to storm out of the single currency is rising all
the time. The euro crisis has not gone away, it is just waiting somewhere over the horizon.

The euro has been locked in a downward spiral against the dollar for since its peak in early April,
repeatedly reaching fresh lows for the year. An economy that is doing little more than
stagnating, along with an economic revival in the US, will continue to weigh on the euro. We
expect it to fall much further in the quarters ahead. The 1.2660 level should be seen by the
week of October 6. The single currency could fall to 1.22, a level it has not seen since
June 2010, the height of the European debt crisis, by the end of the year. When the next
significant low arrives in February we could be at new lows for the last decade.

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COMMODITY Long-Term View

The Commodity Boom Is Over

Prices of iron ore and coal are hitting
lows in China, the US crops are
overwhelming storage space, the
energy sector is burdened with
oversupply, and the metals complex has
turned south again. The cyclical picture
and trend channels also scream that the
upmove is over. Although the very long
mega-cycles of 35 years plus-or-minus
a few years are somewhat
undependable, we have argued over the
last decade or so that the peak should
come in 2015 considering how clear
the 1980 peak had been. With this
break below our channel pattern that
occurred several weeks ago in early August, we have to argue that we have seen the high
of this cycle (a bit early) the equivalent of 1980. If we are right the decline should be
precipitous, even more like the one in 2008 than the one in 1980, but almost all declines of this
type are very aggressive.

The next cyclical low should be seen in December or possibly January. Our target is the 560
level which would put us at the low back in June 2012, which we see as a somewhat important
low for this market. From that June equities rallied to where they are today and a month later the
EUR/USD rally began. So if there is any chance that this decline does not turn into a rout, the
Goldman Sachs Commodity Index will have to hold that 560 area.

The shorter-term picture argues that we have just passed the perfect time for a medium
term high in this index around the 610 level and the direction over the next three
weeks should be down. We would not expect to see the Index move back above the 610 area
and if it does we would have to expect a rally into early October but we think this is very
unlikely. Much more likely, the Index will break through support between 599 and 600 and
reaching the 582 level by the end of the month. A move to the 575 level is possible but less
likely. Early October should see some strength but by the second half of the month we expect to
be headed down again.

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CURRENCY Commodity Currencies Long-Term View

The Kiwi Clips its Own Wings

Governor Wheeler and the RBNZ jumped into
the fray and pushed the New Zealand dollar
lower very early on Thursday, but the RBNZ
has had a lot of company among the analytical
community. Although the currency dropped by
almost a percent in the past 24 hours,
Wheelers actions probably will have little
impact on the trajectory of the Kiwi. It is
already dropping as fast as a flightless bird
would and is very near its terminal velocity
already. The NZD/USD should fall further
today, but on Friday we expect a bounce at
least into late Monday and possibly into next
Wednesday, September 17. The bounce, if we
can call it that will be held by the .8260 to .8300 area and then the currency will drop to our first
target on the chart at the right, identified by the red box centered on the .8000 area around
the week of October 6.

As one might expect looking at our chart, our interest here is not Wheelers latest comments but
the very long-term picture for this currency. If we have made a mistake here and we certainly
have it is looking for a bounce (and we have done it again). Our latest letter on September 5
was titled Kiwi Should Steady for a Week. Although we argued you should sell on any strength,
we have not really seen any. In that same letter was a piece entitled, The Commodity Boom Is
Over, and that is the real point. The chart on the right puts the situation in a picture format.
There the New Zealand dollar, after reaching almost exactly the last day of July 2011 high, has
turned sharply lower and has broken through the uptrend line, which started in 2009. This
decline looks roughly similar to the first three months of the one that started in March 2008 and
then accelerate lower in the second half of July. If the timing were to be the same, the
acceleration would start in the second half of October. Our target for January is the .7300 to
.7500 level, which would equal the low back in November 2011, hit after the first thrust down
from the Kiwis first all-time high.

The longer term picture we have shown is a double top and the target of that is around the .5800
area, a level that would equal the very long-term upchannel from the major low in late 2000
around the .3850 level. The rate of change of the NZD/USD over the past 14+ years from that
date is 120 points a year, about 1.5% to 2.0% on average over that time-span. It seems to us
this would be an appropriate rate and we would not regard the Kiwi as substantially
undervalued until it went below the .5800 level. Remember, the last 15 years have seen a
spectacular run higher in commodity prices and the dramatic growth of China. How can it get
any better? Australia has not been the only lucky country, New Zealand has been as well.

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