The Euro bears should relax - its coming their way!
04 June 2010
The Macro Trader’s view:
The Dollar has benefited greatly from the Sovereign debt crisis in the Euro zone, as traders sold the Euro amid fears the single currency might actually break up. Initially, traders were concerned the debt mountain built up by mainly by Greece, but also Spain and Portugal posed a serious risk, and the authorities acted to address that.
The crisis continued as traders began to fear the entire Euro zone was at risk by means of contagion. Again the authorities acted. And a period of relative calm has emerged as China denied market rumours last week that she intended moving away from the Euro as a reserve currency. And Germany extended its initial limited ban on naked short selling, to include all German stocks and Euro zone denominated government Bonds.
But is this enough to restore confidence in the Euro?
Looking at US equities one might think yes, but the US economy is performing very well and current data releases are showing the Euro zone crisis has had no discernable impact on the US economy.
So what lies ahead for the Euro? Will it slowly start to recover, or will it weaken further?
We judge the Euro is at risk of further serious weakness. As mentioned, the symptoms of this crisis, the build of government debt through running too large budget deficits over time as a matter of economic policy are being addressed
But is the cause being addressed? The Euro zone and especially the likes of Greece, need to devise a recovery strategy that fosters economic growth through private enterprise, and not through public spending. Allowing employees in Greece to retire at 51 is a policy that is un-sustainable and too costly.
Can the Euro zone rise to the challenge? Well if it wants to ensure its long-term survival it must.
The Euro zone needs to evolve and develop a political and fiscal dimension. The US and UK are single currency areas with rich and poor regions. But because they have a unified political and fiscal policy making regime, the rich areas support the poorer areas through fiscal transfers.
One could argue that the recently-created support fund will do just that, but it will not. It was only created to prevent a Euro zone state from defaulting on its sovereign debts. A system needs to be devised so that transfers take place as a matter of course before fears of default even come close to appearing on the radar.
So can the Euro recover or will it sell off further? We believe that it will weaken further, due to the deficiencies highlighted above and because the US economy is entering a stronger recovery phase. Only today a Fed official was talking about the need for policy to be tightened before too long.
So the Dollar benefits from strong domestic growth and the Euro is weakened by domestic policy disarray.
The Technical Trader’s view:
DAILY CHART
Much of the bears’ anxiety has arisen from the market’s reluctance to sell off through and stay below the 1.2333 low…
and the lack of penetration through the 1.2133 Fib support - they have noticed that the market has bounced from it three times and worry about short-covering.
WEEKLY CHART
But the scope for short-covering looks modest:
The market has pushed on down through the Prior Pivotal lows, and close twice beneath them.
That band 1.233 –1.2461 should now be good resistance.
This adds to the bear impetus.
MONTHLY CHART
And anyway, in the longer-term charts, the Euro remains under tremendous pressure.
The Head and Shoulders Top has been completed, the minimum measured move is clear – as far as 0.90.
Which is more or less the lows of the market in 2001.
We remain modestly short and would go shorter on any bounce
Mark Sturdy
John Lewis
Seven Days Ahead
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