Sep 24, 2022Liked by Peter Nayland Kust

Speaking of forex, have you checked a EUR-USD chart today? Looks to me like the Euro has broken that last bit of support near $1.00 today. The question now, is: How low can it go?

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I hadn't looked specifically at the EUR-USD charts today, but you are right that there does appear to be a market capitulation on euro parity with the dollar.

The euro has been trending down against the dollar since Tuesday, breaking below dollar parity early Tuesday morning.

How low can it go? Quite a bit lower. Much depends on how Germany will respond to increased energy costs this coming winter.

However, because the euro has always been from inception a synthetic currency, as much a product of politics as of economics, there is a corollary question: how low can the ECB allow the euro to go? As we've seen this week with the Japanese Yen, there is a limit to how much currency depreciation a central bank can endure before it feels compelled to take actions to support its currency.

The Bank of Japan intervened by selling dollars to buy yen, thus boosting the yen for the time being.

The ECB might feel pressured at some point to undertake a similar strategy, but at this point it's likely already too late for direct market interventions to do much good. And if they do intervene in the marketplace to support the euro, and those interventions fail, the credibility of the ECB will get hammered in the process--nothing undermines confidence in a central bank quite so much as its inability to stave off currency depreciation against the other fiat currencies of the world.

At some point, euro depreciation becomes an existential crisis for the ECB. Where that point is or what happens once it is reached is still an unknown, but if current trends continue that point will be reached, and likely sooner rather than later.

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Sep 23, 2022Liked by Peter Nayland Kust

The Russian stock market is heavily weighted with fossil fuels, and markets for fossil fuels worldwide have been dropping like a rock. The key takeaway is that markets worldwide think they see a severe recession which will squelch demand. So, rough times ahead, war or no war.

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Indeed, the predicted huge price spikes in oil have not occurred.

However, this means that the best case for Russia is that this week's market declines have nothing to do with the war in Ukraine. Given the timing of the market drops, this is an unlikely read on market sentiment.

Some of the problem is the knock on effects of financing a war. Russia is preparing fairly huge export tariff increases to cover a budget deficit--a deficit cause in no small part by the war itself. Russia is making its energy exports considerably more expensive, and the carve-outs for China on natural gas make them politically expensive as well.

Ironically, had Putin merely sent troops into the Donbass and limited his military operation to just the Donbass, he likely would have been able to obtain full control over Luhansk and Donetsk, much like he did in Crimea in 2014. While this move would have been extremely controversial, and would have invited a measure of sanctions against Russia, it would not have been the extreme decoupling of Western economies from Russia that we have seen over the past few months. Also, the active pro-Russian separatist movements in Luhansk and Donetsk would have provided a measure of political cover.

Instead, Russia is now waging a naked war of conquest. This is no longer a "special military operation", but full-on war, and at a time when Russia's economy is not in great shape to absorb the costs of that war.

In 1918, the German Empire was essentially bankrupt, forcing the surrender at Compeigne. While it is too soon to say with certainty that this will be the case for Russia in the Ukraine, the markets are hardly giving a vote of confidence to Putin's war.

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