German Court Ruling Pushes Euro Higher

Stocks, commodities and the euro have all risen this morning following the German Constitutional Court ruling in favour of German participation in the European Union’s new “European Stability Mechanism” (ESM) fund. The €500 billion ESM is designed to help eurozone countries stave off sovereign default. The court stated that the €190bn “ceiling” on German contributions can be only raised by lawmakers, which implies that the bill for German taxpayers could easily run higher.

The EUR/USD briefly nudged above $1.29 this morning, and looks like it could be in the early stages of a move that takes it back up to around $1.50. Similarly, the Dollar Index has fallen below 80.00 for the first time since early May. With all the talk of the Federal Reserve firing up the printing presses once again, and even German Finance Minister Wolfgang Schaeuble openly describing US government debt as “much too high” and the global economy as being “burdened” by this debt, the buck is coming under pressure.

This should push commodities – and in particular –precious metal prices higher, as discussed by James Turk in his latest KWN interview.

Why does the euro rally when the inflationistas are getting their way, and why does it sink when the hawkish Bundesbankers are at the centre of media attention? This is paradoxical, considering that the former’s recipe for keeping the currency bloc intact will devalue the euro, and thus – one would have thought – lead to it falling against the dollar and other currencies.

This can be explained by the fact that market attention has been focused in recent months on the question of whether or not countries will leave the eurozone. Given that, in Mr Market’s view, the very survival of the currency was threatened by German intransigence, the fact that this roadblock has been lifted makes traders think that the currency is more likely to survive. So the EUR/USD rises.

The key takeaway is that such FX measures are relative, not absolute. In absolute terms, all currencies are falling in value, as measured against gold, silver, platinum, palladium, copper, crude oil, rice, and – as illustrated in the neat chart below from Casey Research – corn.