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Chart In Focus

Crude Oil Leads the Euro

Chart In Focus
February 12, 2015

There is information about the future of the euro, and it is hidden in plain sight, right in the chart of crude oil prices.  

This week’s chart reveals that relationship, which is yet another example in a long series of what I call “liquidity wave” relationships.  That refers to the phenomenon of a price structure appearing in one market’s price plot, and then appearing again sometime later in another.  I liken it to an ocean wave appearing at the end of a pier, and then hitting the beach several seconds later.  If you can figure out what price series represents the end of the pier, and what other one responds later, that can be terribly useful information. 

The movements of crude oil prices are getting repeated about 3 weeks later in the movements of the euro.  Why oil and the euro, and why 3 weeks?  Trying to solve that can be a maddening exercise.  I do not have a ready answer, but after seeing it work so well for so long, at some point one gives up on the insistence to know why, and accepts the fact that it is so. 

Here is the same relationship, zoomed in closer to see the recent action in more detail:

crude oil leading indication for euro

It says that the recent pause in the euro’s decline has happened right on schedule, and that one more low is due for the euro before it sees the echo of oil’s recent rebound.  Crude oil prices made their closing low on January 28, 2015, so 3 weeks later equates to Feb. 18 as a target for a euro bottom. 

How much of a bounce the euro might see from a bottom will depend on how well crude oil continues its bounce.  With the ECB’s new QE program set to start in March, and with the financial world knowing about how the Federal Reserve’s QE helped to boost the U.S. economy and thus the dollar, it is natural that the ECB’s QE program would be expected to lift the euro.  That will likely be the story which gets the play in the financial media, because most analysts are unaware of this relationship to crude oil.  

This is a profound point.  Major brokerage houses and economic analysis firms spend millions of dollars analyzing euro-land GDP data, interest rates, credit worthiness, and other supposed relevant factors, all to hopefully get an insight about where currency exchange rates are headed.  I wonder, how would they feel if they somehow found out that just looking at crude oil prices would give them most of the answers?  And I also wonder, would they believe it, even when confronted with the evidence? 

So we now know that the price of crude oil leads the euro.  So what does the euro lead?  Here is the answer:

euro leads TYX

If we take the price plot of the euro exchange rate versus the dollar, and shift it forward by one week, we find that it makes a great leading indicator for the Treasury Yield Index, which tracks the current yield to maturity on the most recently issued 30-year Treasury bond.  Once again, if you start down the road of wondering why, you’ll just fry a few neurons without a good result.  It’s just something which happens. 

The recent decline in T-Bond futures prices has brought with it a rise in T-Bond yields, and right in step with what the plot of the euro has shown.  Bond yields are now at the pause point for this countertrend up move.  What happens to bond yields depends on what the euro does, which as I note above depends on what oil prices do. 

And you thought that the Fed was in charge. 

Tom McClellan
Editor, The McClellan Market Report

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