Yield Differential Still Seems in Charge of Euro versus US dollar


“All sentiment is right; because sentiment has a reference to nothing beyond itself, and is always real, wherever a man is conscious of it. But all determinations of the understanding are not right; because they have a reference to something beyond themselves, to wit, real matter of fact; and are not always conformable to that standard.” 

                                                                                                                        David Hume


Commentary & Analysis

Yield Differential Still Seems in Charge of Euro versus US dollar

To show a market correlation is to show a market correlation. That is about it. The reason I say that is because we can never really be sure which of the pieces of price data in the correlation is leading and which is following. And to go further, even if we did know which was leading we then run into the problem of then “forecasting” where the lead piece of price data is going in order to help “forecast” where the follower is going. Thus, I think correlation analysis is useful, but it must be handled with caution.

In that vein, you have probably heard plenty of people trying to forecast currency prices using a forecast of interest rates. I have been guilty of implying the same in my missives. But in reality, it’s a mug’s game to predict currency action by trying to forecast interest rates. Because as John Percival, of Currency Bulletin said many years ago, and I am paraphrasing: If we can forecast interest rates then why bother with currencies; just buy a seat on the Chicago Board of Trade and retire very wealthy. Wise advice as always from Mr. Percival…

Mr. Percival did go on to say that there is meat when it comes to interest rates, and it flows from the yield and inflation differentials. He said these differentials “seem to be the basic fundamentals of currency analysis.” Change is what moves prices, and “in currencies, changes in real yield differentials are a basic value benchmark.”

So, in that vein, below is a chart of the US versus Eurozone 2-year Benchmark Yield Differential. As you can see, the US dollar index has been tracking closely on the yield differential i.e. as the spread moves higher in favor of the US, the dollar index rises, and vice versa. 

Screen Shot 2013-07-25 at 10.04.10 AM

This differential analysis could become increasingly important now that we finally seem to have exited the pure and mind-numbing “risk on” and “risk off” world of investing.

So, I think it is fair to expect (guess) that US economic growth is most likely to be faster than Eurozone growth in the months ahead. If that proves true, then it’s likely the 2-year yield differential will continue to grow in favor of the US dollar. And it’s a key rationale for why I expect the move higher in EUR/USD over the last 10 trading days is “corrective” in nature and the longer term downtrend will reassert itself soon.

But, surprise is what moves people to move prices. And just because careful consideration goes into a guess about the future, doesn’t make it so. Spain reported today the country’s unemployment level fell for the first time in two years. So, we can never say “never,” and that’s why we trade using stops (mental or otherwise).

If you wish to learn more about our forex service, please click here.
[Correction: In yesterday’s Currency Currents I said I expected bond prices to “go lower” in the months

ahead. I meant to say bond prices to “go higher.” Sorry for the error.] Thank you.

Jack Crooks
Black Swan Capital



Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully read Black Swan’s full disclaimer, which is available at 


Has the Chinese Economy Hit the Great Wall?

Screen Shot 2013-07-25 at 8.24.24 AMThe lazy days of summer trading continue. The Dow barely moved yesterday. Gold fell $15 an ounce – to be expected after the recent big move up.

We left Vancouver, where we were giving a speech at the Agora Financial Investment Symposium, only a few hours after getting there. On the airplane to Beijing we puzzled about time and place – trying to work out the movements of the Earth, the sun and the airplane.

The flight took 10 hours. From our fuzzy memory of the globe, China should be almost on the exact opposite side of the world from the US. So you would head north from Canada to go to China.

But the plane didn’t seem to be going north. It was going west… or northwest. Looking out the starboard window after midnight, we saw the warm glow of the sun over the Arctic.

At least, that’s what we thought we were looking at. But then the light failed. We must have been going away from the east… so we must have been going west.

But why?

You don’t mind if we take a moment work out these important celestial movements, do you, dear reader?

If you fly from one point to another you have to take into account that the place to which you are going does not stay put while you are going there.

There are 24 time zones on the Earth. A 10-hour flight gives the planet time to complete about 40% of a revolution. This means, obviously, your target airport must rotate through 10 time zones… or about 10,000 miles if it is on the equator… toward the east while you are in the air.

The airplane must, therefore, aim not for the place you are going but for the place it will be when you get there, a place far to the east of where it was when you left.

We’re not sure this has any importance to anyone other than pilots, but we found it interesting. And the same phenomenon happens in football and quarterbacking. You aim in front of your moving target.

Big Trouble in China

There is a parallel phenomenon in investing. You don’t really care what the price of gold is today; it’s what the price will be in six months… or six years… that matters.

Revolution is a fact of life. The planet revolves. The markets revolve round and round too.

So do economies…

We’re in China today. Want to know what is going on China? We don’t know but a lot of people think they do. Here’s Paul Krugman in the New York Times:

The signs are now unmistakable: China is in big trouble. We’re not talking about some minor setback along the way, but something more fundamental. The country’s whole way of doing business, the economic system that has driven three decades of incredible growth, has reached its limits. You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be.

And here’s Ben Levisohn in Barron’s:

Unlike three months ago, when investors were placing big bets that China’s policymakers would pump cash into the economy to spur growth, the markets seem to have accepted the fact that sluggish growth for the world’s second largest economy is its new normal.

Where will China be in six months… or six years?

It is impossible to know. Goldman Sachs slashed its estimates for China’s growth. But it has no better idea than Paul Krugman or anyone else. The Chinese could surprise us in either direction. The economy could fare worse than expected… or better.

But one thing does appear to be happening. After 20 years of spectacular growth, China is looking for a new way forward.

“It’s not enough just to open a factory in Shenzhen and make things for export,” explained a Chinese colleague. “The days of the entrepreneur who grew up under communism and then went on to become a billionaire are over.

“That was the first stage of China’s development. It was the entrepreneurs’ phase. And it happened right after Deng Xiaoping opened the economy up. Entrepreneurs took advantage of the opportunity, using low wages to make things for the developed countries.

“China’s wages are still low compared with the US or Europe. But they’re not low enough. And the developed countries are no longer looking to outsource their manufacturing to China anyway.

“The next phase will be different. No one knows what it will be. But it will be different. And yes there could be a revolution in China… but I doubt it. People are pretty happy with the last 20 years. They expect the next 20 will be good too.”


Bill Bonner


Collision course: China and Japan…Starring the Eurozone, with US in a cameo


“There are two trains running in East Asia, each fueled by hollow rhetoric and propelled by dangerous, self-deluding myths. Each of these locomotives heeds only its own signal, and the danger grows by the season that, if there is no coordination, a huge wreck might one day ensue.

“The two trains are, of course, China and Japan. The former, long decrepit, its wheels rusted by decades of Communist mismanagement of the economy, has lately worked up a huge head of steam. China surprised the world by announcing it had “discovered” previously unaccounted-for economic production equivalent to the output of entire countries, say, Austria, for example. Whoops: “Off the tracks! We’re coming through!”

“The other country, Japan, a longtime economic superstar, had been in the doldrums for over a decade, a victim of high costs, excessive regulation and a slow-to-adapt mentality in a fast-changing world. Japan is enjoying something of a revival, at least in a near-term economic sense, and today, the country’s conservative leadership is feeling its oats, evidently in no mood to play second fiddle to an accelerating China.

“Competition exists between these two countries on many levels, as do animosities both recent and old.”                                                                                                                               – Howard French

Commentary & Analysis

Collision course: China and Japan…Starring the Eurozone, with US in a cameo 

Countries have interests.  Most have allies.  All have enemies (real, perceived, and of the manufactured variety).  In times of economic turmoil enemies appear more menacing.  The normal jockeying for position by a country during the good times, may often be perceived as a threat (or opportunity to manufacture a threat) by another during the bad times.  It seems China and Japan, because of the inordinate impact of global rebalancing on current account surplus countries, may be locked into this game of “perceived or real” threat for some time.  Interestingly, the key global economic policy choice being made inside the Eurozone could grease the slides along a collision course for China and Japan.  The impact of such a collision would likely lead to an end of the euro currency regime as we know it, but the potential impact on the global economy would be even worse.  


Read on …Currency Currents 24 July 2013

How Our Monetary System Works And Fails

Monetary history teaches us that governments always abuse their money-printing powers. Debt crises are not new. The scale and scope of today’s debt crisis, however, is unprecedented.

Video created in cooperation with


Top Comments



    Thank you! FINALLY, this is a video that I want to share. It addresses the main issues very clearly and yet doesn’t confuse those who are new to the subject.

     · 9 

  • Zoopy Joobles 

    Good video, simple and to the point.

    All Comments (24)


  • fallingman11 

    As an old voice over guy, it hurts me to hear the narrator, who has a great voice, but little sense of the content, pronounce the word statist incorrectly…like static as opposed to state-ist. Was no one supervising?

    This video has several excellent parts and it’s missing the mark slightly in several others. I appreciate what they’ve done and at the same time would like to have seen it be all it could have been,

     ·  in reply to Karma King (Show the comment)

  • fallingman11 

    They’re dealers providing a service in exchange for a markup. I’m sure you’re familiar with the concept.

    They aren’t selling THEIR gold, which I’m sure they hold plenty of individually.

     ·  in reply to halfcab123 (Show the comment)

  • Karma King 

    Brilliantly produced. Brilliantly distilled. For more detail google “criticism of fractional reserve banking”


  • kingofthepaupers 

    Jct: True, I’ve had little success with our English blacks and whites, but why them first, are they brighter than us? Same malfunctioning chips systems everywhere, same math. Besides, I don’t have to convince the masses that the bank software needs debugging, I just need to offer a debugged LETS timebank program.

     ·  in reply to Zoopy Joobles (Show the comment)

  • halfcab123 

    If Gold is the answer, why are they selling it ?


  • Claudio Grass 

    you cant convince the government …. hopefully we can awaken the interest of the people to do their own research what to accept as medium of exchange

     ·  in reply to AquaBuddhaDeluge (Show the comment)

  • Claudio Grass 

    money is about quality and not quantity….and so far you still can purchase physical gold and silver…. in regards to the inflation model – sure you get new money because the collateral e.g. the government is using us a a collateral by increasing taxation and inflating away our savings…

     ·  in reply to kingofthepaupers (Show the comment)

  • Claudio Grass 

    True – that would be Marx Vision of a nationalized currency system… I personally favor a monetary system that does not allow a small elite (gov or bankster) to print money out of thin air, which can then be use to bribe politicans, to destroy international trade with subisides/restrictions or finance wars… a uncovered paper money system people will end up in slavery because in such a system property rights do not exist.

     ·  in reply to endtheillusion (Show the comment)

  • Claudio Grass 

    Aristotle came to the conclusion that “In effect, there is nothing inherently wrong with fiat money, provided we get perfect authority and god-like intelligence for kings”.

     ·  in reply to ymom11 (Show the comment)

  • Claudio Grass 

    no need to – they are purchasing already for a long time…

     ·  in reply to Zoopy Joobles (Show the comment)

  • Zoopy Joobles 

    Good video, simple and to the point.

     · 6 

  • ymom11 

    All good points, however it seems like gold propaganda. It left out the fact that all US fiat money is created with debt attached as a loan. Because of this, there is more debt to bankers than exists money in existence and the debt is growing. To participate in markets people need this debt attached currency and it makes everyone a debt slave to the bankers. Fiat currencies have and can work when the government is responsible e.g. American Colonial Scripts.


  • ymom11 

    Gold is not the end-all be-all. Its value is easily manipulated by those who have cornered the market like what has been done to diamonds. Gold backed currencies can be inflated or deflated by those who own the vast majority of the world’s wealth. The best answer is a responsibly managed fiat which has rarely existed in history.

     ·  in reply to ymom11 (Show the comment)

  • endtheillusion 

    You say in the video that the govt needs the banks to print the money. Actually the govt could print the money itself and save itself the costs of the interest payments on the bank printed debt notes.­1.html


  • AquaBuddhaDeluge 

    I’m not so keen on the inflation that would bring about, but I sincerely wish you luck in convincing the govt to stop borrowing :o)

     ·  in reply to endtheillusion (Show the comment)

  • kingofthepaupers 

    Jct: What a piece of trash, as if there would ever be enough yellow or silver rock to go around. Screw the Gold Standard of Money, poor people have no gold, only bullion brokers are cheering this on. Better the Time Standard of Money, join a LETS timebank for some interest-free credits. Forget low-tech rock, think high-tech credits. The inflation model is silly, no one gets any new money without putting up collateral. Seems they forgot the doubled collateral when they doubled the money! Har har!


  • Zoopy Joobles 

    Now convince over two billion Indians and Chinese of this.

     ·  in reply to kingofthepaupers (Show the comment)

  • Mark Mason 

    What a great video….I also recommend “Money as Debt” a 46 minute cartoon…Very important.


  • commchf 

    this is complete garbage


  • PineBrookHills 

    Thank you! FINALLY, this is a video that I want to share. It addresses the main issues very clearly and yet doesn’t confuse those who are new to the subject.

     · 11 




















Screen Shot 2013-07-23 at 5.02.40 PM




Now actually take a moment to think about it, which Reuters obviously didn’t do (or if they did they didn’t care that their conclusion doesn’t make a whole lot of sense.) But I suppose what matters is what traders and investors think about the news.

Here’s what I think:

China is facing a very real credit market dilemma. And they openly recognize the growing risks of perpetuating their investment-led growth model of recent years. Yet they come out now and claim investment can further prop up economic growth and help China avoid a hard-landing.

Maybe in the short-term. Maybe if they create artificial demand for certain commodities and materials by promising railroad projects. Maybe if prices of these commodities and materials don’t fall further, maybe China can convey a sense of economic recovery.

It’s the same modus operandi. And maybe that way of operating still has some life left.

I tend to think it doesn’t. 

Read on …

……..Currency Currents 23 July 2013