Is the Squeeze Over in the Dollar Euro?

By: Seven_Days_Ahead

Despite the Dollar’s recent weakness against the Euro, we sense the market is undergoing a correction rather than a trend reversal. The situation in the Euro zone remains delicate. Indeed, the only thing that has changed in recent weeks is that the endless stream of negative commentary about the Euro zone has virtually dried up.

The Technical Trader’s view:

The Macro Trader’s view:

This has allowed traders to recast their focus and right now the hot news is the surprise miss firing of the US economic recovery. Recent data has remained soft with this week’s release of a below consensus ISM non-manufacturing survey just the latest piece of disappointing news.

But why, if the Euro zone’s problems persist, are traders now buying the Euro?

Currency trading is a function of relative, rather than absolute, strengths and weaknesses, so while in absolute terms the under lying fundamentals of the Euro remain flawed, in relative terms it is the Dollar that is currently suffering from relative weakness due to fears about the US economic recovery.

But the 2nd quarter US corporate profit reporting season is about to start and if the news from the leading Banks and corporates beats market expectation, the Dollar could well recover and throw the spot light back onto the Euro zone.

Moreover, with the Euro zone pledging to release the results of stress tests on leading Euro zone Banks the Euro could quickly come under selling pressure once again. The fear was the Euro zone Banks, especially in Germany and France are heavily exposed to the Sovereign debt of several of the peripheral Euro zone economies that have been heavily downgraded. Since the fear of Sovereign debt default is still very much alive with Greek sovereign debt ranked as the second worst in the world, those stress test results may cause some difficulty for the Banks and the authorities.

On the other hand, we judge the Dollar to be long-term bullish. Although the US fiscal landscape is challenging to put it politely, and US interest rates cannot go any lower, the Fed could still act to help support the flagging recovery.

It could buy Treasuries, thereby relieving some of the potential funding worries the administration might have if they go for a 2nd stimulus. The Fed could also buy corporate Bonds, either in the secondary market or at point of issue, thereby side stepping the Banks and getting money out directly to ‘Main street’ in a direct effort to spur growth.

But however you view the situation, in the long term we judge the Euro to be  flawed and in its current incarnation will struggle to survive. Decision making in the Euro zone needs to be centralized both politically and fiscally and we do not think the political will exists to bring that about.

So patience is needed (and long Stops too), if the current correction is going to be ridden by the Dollar Bulls.

Mark Sturdy
John Lewis

Seven Days Ahead
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Mark Sturdy, John Lewis & Philip Allwright, write exclusively for Seven Days Ahead a regulated financial advisor selling professional-level technical and macro analysis and high-performing trade recommendations with detailed risk control for banks, hedge funds, and expert private investors around the world. Check out our subscriptions.

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