Dissecting the Crash of a Currency & What it Might Mean for US Stocks

After spending the 2nd half of 2014 in a steady downtrend, the euro currency has entered crash mode at the outset of 2015:

EUR_USD_Daily_1.22.2015

EUR/USD is down more than 600 pips so far in January and the euro is down much more against other currencies such as the Swiss franc. Realized volatility is spiking to multi-year highs and price has broken all sorts of support levels on multiple time frames:

EUR_USD_Monthly_1.22.2015

A clean breakdown from a nearly 7-year descending triangle targets a move lower to at least parity between the euro and the US dollar. The only question that remains is when do we get the counter-trend bounce in the euro. The Commitments of Traders Report for the euro has rarely seen such extreme positioning:

Euro_CoT_data

SocGen had this insightful comment following this morning’s trillion euro QE announcement from the ECB:

“EUR/USD will be a good bit lower in 1, 3 and 6 months, but won’t fall in a straight line.”

True, but the bounces could continue to be shallow until price reaches the next area of significant support all the way down near 1.08.

Meanwhile, the price of gold in euro terms has reached its highest levels since the April 2013 gold crash:

5-year_gold_in_euros

Finally, a little discussed potential side-effect of the weaker euro and low yields are more deflationary pressures in the US. The most recent range in the S&P 500 appears to be approaching a crucial point of resolution and all of the key characteristics of a topping pattern are in place (higher realized volatility and heavy volume):

SPY_Daily_1.22.2015

Read Also: World’s Most Reluctant Stimulus Program Gets Underway