Sunday, June 3, 2012

Technically The Euro in Downtrend since mid-2008

While the Euro has been in trading news everyday over Eurozone countries like Greece or Spain - technically the Euro has been in a major down-trend since July 2008 when the EUR/USD made it's last poke higher - peaking at the 1.6000 level. The chances of the Euro going back above that level anytime soon are slim to none and the currency pair will stay below that peak for some time to come.

The weekly chart below clearly shows a strong long-term and medium-term downtrend:

If there was ever a "contrarian trade" now would be the time if the Euro is to recover because it would be very oversold if there's a case for recovery in June. However should the debt crisis lead to a member(s) to exit the Euro, it is quite possible the Euro could continue to slide, and it could slide to it's demise because there are many holes in the Eurozone economy.

One has to weigh several factors and consider:
1. just how much of an impact the weaker countries in the Euro have to the overall value of the Euro;
2. what it means to the stronger members if a weaker member defaults or continues to need bailouts (perhaps a default or two would be good because of the bailout burden but it would likely effect the exchange rate - the fear is a landslide collapse and domino effect from other eurozone countries that might decide to leave while the door is open);
3. the state of the global economy and the prospects of the Euro-zone being able to pull out of Europe's recessionary conditions in a weak global environment;
4. if the weaker members do not leave the Euro what it will mean to stronger members (primarily Germany, 2ndly France - the largest EU countries) who have to carry the smaller members weight by providing them "large" bailouts (the bailout problem is worse the longer the economy does not recover and should larger medium size members need bailouts (likely they will especially after it all tanks) it will be tougher bailing them out than bailing out a little country/economy like Greece - which has already made the Germans angry - when the bigger one's need the same type of stimulus the show could likely be over because they will need much more than Greece).

June seems to be a very critical month with risk assets (major equities in particular and commodities) gaining selling momentum which spurs concerns of a major collapse; combined with the turmoil in Greece, trouble in Spanish bond market (a banking sector saddled with toxic loans), weak US non-farm payrolls, weak US jobs market data, the Greek election in June, and the US FOMC meeting; it is a long list of things to consider that could either make or break the market this month.

Should it be that the data is at it's lowest point for the year and the FOMC pumps the market there could be a considerable bounce. But if the turmoil is too strong it could tip the risk markets for a deeper fall.

Neal Vanderstelt - Currency Analyst
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