Watch Out For The Shock, It's Coming

With the euro trading slightly below $1.05, now's a good time to look at why that level is the key technical pivot point.

ZeroHedge posted this chart of the euro from Societe Generale, which goes back to the 1980s. (The euro didn't exist back then, so a basket of the euro member's currencies is used instead). The $1.05 level marks the bottom of the long-term uptrend in the common currency. In a separate view, technical trader Tim Knight also identified the $1.05 level as being crucial: So Are We There?

ZH: Why 1.05 Is Far More Important To The EURUSD Than Parity

This perfectly matches the downtrend in the U.S. Dollar Index (which is 57.6% euro), a downtrend that was broken in the past week. The USD Index and euro do not experience the same percentage change, but these two charts will continue to move in opposite directions. Either the U.S. dollar has broken out and a huge bull market is on the way, to be confirmed by a further breakdown in the euro, or the spike in the US Dollar Index is a head fake for the moment and the euro is about to bounce.

Here are some possible targets for the US Dollar Index if it breaks out. If the index does a 50% retrace to 118, that would be another 18% gain for the dollar and a drop to about $0.88 on the euro. If the retrace goes to 129, the euro could sink as low as $0.77. A full 100% retrace back to the 1985 would imply a euro trading at $0.44. Instead of being the Deutschmark II, it would become the new incarnation of the lira and drachma.

At 12 seconds in, you can see the U.S. dollar rally occurring. At 25 seconds, the shockwave hits. The warning for global investors: "Watch out for the shock, it's coming."


Greenback Fly

Americans have the Tea Party, Germans have the Mark Party?

Opposition to the Euro Grows in Germany

For the time being, no political party has focused on the currency concerns. In reaction to the crisis, German Finance Minister Wolfgang Schäuble, who is also a member of the CDU, has urged closer cooperation in European politics -- which is precisely the opposite of what many people want. The center-left Social Democratic Party (SPD), which stylizes itself as the party of the common man, is a strong proponent of euro bonds -- joint European government bonds that critics say would place the burden primarily on German taxpayers.

By contrast, the conservative Christian Social Union, the CDU's Bavarian sister party, can't make up its mind as to which of two party members it should take inspiration from: Theo Waigel, who paved the way for the euro when he was Germany's finance minister, or Peter Gauweiler, who has challenged its constitutionality in court.

Pollsters like Matthias Jung from Forschungsgruppe Wahlen say that they can imagine the formation of a protest movement coalescing around euro-related fears. "The government has to prove that the bailouts for Greece and Ireland serve our own needs in Germany," says Jung. "If the billions in aid are not convincingly justified, it will lead to a legitimation crisis."

This may surprise some folks as well: despite the weak euro benefiting German exports around the work, German industry says they did fine under the regime of the strong deutschemark.

Another opponent of the European currency in its current form is Hans-Olaf Henkel, who was for many years the head of Germany's leading employers' association, the Federation of German Industries (BDI). "The statement that German industry benefits enormously from the euro is like the Ten Commandments in Germany," he says. "But Germany was also the world's second biggest exporter in the days of the deutsche mark. The proportion of euro-zone countries purchasing our exports has even dwindled since the currency's introduction."

Henkel is in a hurry. Just in time for the euro crisis, the one-time enthusiastic supporter of the common currency has now written an anti-euro book titled "Rettet unser Geld!" ("Save Our Money!"). Controversial German author Thilo Sarrazin wrote the dust-jacket text. Just as the former Bundesbank board member Sarrazin has capitalized on the immigration debate in Germany, Henkel wants to take advantage of the underlying mood among the population. In fact, after giving a reading in a Hamburg bookstore, listeners asked him why he didn't run for office in the city government. Following a one-hour flight, he makes an appearance in Frankfurt, before participating in a talk show on German television.

Henkel has a mission: He wants to divide the euro. All of the "olive countries" -- as Henkel dubs the Greeks, the Italians and the French -- should pay in southern euros in the future, he says. The north -- in other words, primarily Germany -- would pay with the northern euro.

The DM is a political issue waiting to take shape and a decline in the social mood is just the type of force that could bring it to fruition.

Euro in a Coma? Give us back the D-Mark!

Euro im Koma? Gebt uns die D-Mark zurück!

Prof. Dr. Stefan Homburg is talking about setting up a parallel EU with Holland and Belgium, even excluding France because they don't have the proper culture of responsibility.

German Public TV: Bring Back the DMark!

ARD is running a program tonight that is openly debating the pros and cons of reintroducing the deutschmark. The pros include the deutschmark becoming the anchor currency of Europe and making Germany's debt easier to repay, since the deutschmark would likely rise versus the euro, and certainly against any other reintroduced national currencies. Overall favorable toward bringing back the DM.