Friday, April 12, 2013

Market Analysis: Euro

When talking about the euro's chart, it's actually best to start with the weekly movements as it allows us to see the two primary trends over the last few years:

From May 2011 to July 2012, we see s general downtrend that started and continued because of the continued fiscal problems of the region and the declining economic output.  Starting in July of last year, we have the Draghi rally -- caused by the ECB's head stating he would be whatever it takes to save the euro.  That was taken by the markets as an implicit guarantee of the euro and the capital markets of the region.  As a result, we see a rally that lasted for 8-9 months.  Finally, we see the latest sell-off that started in early February as the EU had another round of crisis started by the Italian elections and followed up by the Cyprus bail-out.  It was also during this time that we have seen continued weak economic numbers coming from the region.

On the daily chart, we see the Draghi rally from late July to early February, along with the sell-off that started in late February that broke the trend line.  Prices are now just above the 200 day EMA.  They have risen about the 10 and 20 day EMAs as a result of the BOJ's announcement to increase liquidity (making the euro more attractive relative to the yen) and the weak US jobs report (making safe haven currencies more attractive in the short run).

Over the last two months, also notice the weak MACD and CMF readings.

The euro is caught between two very strong currency trading currents.  On the bullish side, the euro is still a reserve currency, meaning other central banks hold euros in various percentages.  In addition, the EU is considered a safe haven -- a currency that is safe to hold in times of trouble.  However, consider this:
The euro’s challenge to the international status of the US dollar has been set back a generation as new data show developing countries dumping the European currency from their official reserves.

Central banks in developing countries sold €45bn of euros in 2012, according to data compiled by the International Monetary Fund, cutting their holdings of the currency by 8 per cent.
This highlights the damage Europe’s sovereign debt crisis has done to its standing in the international financial system as the chance of rivalling the dollar – one dream of the single currency’s founders – slips away.

On the bearish side we have some terrible economic numbers coming from the EU.  GDP is weak, unemployment is high, Italy is still trying to form a government, Cyprus has just been bailed out and the service and manufacturing numbers coming from most of the region via the Markit surveys are incredibly weak.

Both of these reasons for trading a currency are incredibly strong with the euro, meaning it could be whipsawed fairly easily in the current environment.