Hello traders! In this week’s Lessons From the Pros article, I’d like to bring up a topic that is rarely discussed here, which is bonds. I’m not talking about futures contracts on bonds, but what bonds are and what they are telling us about individual countries today.
Before we get to the actual bond discussion, we have to understand a bit about currency strength and weakness and how it affects a nation’s economy. Take a look at your chart of the EURUSD, going back over a couple of years. You can see that the EURUSD has been trending down for several months, indicating a stronger USD vs. a weaker EUR. So who benefits from a stronger local currency, and who is hurt? The beneficiaries of a stronger local currency are the people who do more purchasing of imported goods. As the USD increases in strength vs. the EUR, any goods that are imported from the Eurozone will be cheaper. In this very basic Economics 101 discussion, a stronger dollar means when I purchase a new European car, or suit, or wine, they should be cheaper today than a couple of years ago. The beneficiaries of a weaker EUR would be their exporting countries and companies. So, who is hurt by a stronger local currency, in this case the dollar? Just the opposite. Any exporting companies here will be hurt, as their products will be more expensive overseas. People or companies who rely on imports in the Eurozone will be hurt as well.
So this leads to the question of Germany in the Eurozone. Since they are predominantly an export driven economy, do they want a stronger or a weaker Euro currency? The answer is weaker, making their exports more appealing to buyers elsewhere. But this is only part of the equation in Germany. They are also (seemingly) the only country with… Continue Reading
