Where is the Bottom in the Euro?

By: Richard_Cox

In the last few weeks, the Euro has reversed a good portion of the gains made during the early parts of this year as the monetary policy outlook at the ECB looks to be changing at a rate that is more aggressive than previously expected.  Looking at specific forex rates, the EUR/USD hit an initial high just below the 1.40 mark before making a violent turn to the downside that has pushed traders to an alternate viewpoint where the shared Euro currency is looking much more attractive as a sell on rallies rather than as a buy on dips.  These trends are being aided by new positives in the US economic, and a good portion of the market is now using the Dollar as a means for exiting long positions in the Euro itself. 

ECB Concerns

“For most of this year, the market has largely ignored the concerns that have been expressed by the European Central Bank and sold the Dollar in anticipation of a broader shift away from safe haven assets,” according to the forex strategy team at ForexAbode. “This has led to significant declines in precious metals ETFs like the SPDR Gold Trust ETF (NYSE:GLD) and the iShares Silver Trust ETF (NYSE:SLV), as well as the PowerShares DB US Dollar Index Bullish ETF (NYSE:UUP).” 

In contrast, the SPDR S&P 500 Trust ETF (NYSE:SPY) has pressed forward to new all-time highs as investors have clearly become much more optimistic about the growth projections for the global economy.  But the trends in the Euro here are telling, give the fact that the Euro tends to fall in line with whatever is happening in the higher yielding currencies.  This is because currency markets tend to work for or against whatever is happening in the US Dollar, and the Euro is often the primary alternative for those that are looking to establish alternative positioning. 

The fact that the Euro has not been able to rally is telling, and shows that markets are much more interested in the concerns at the ECB rather than in the historical trends that are seen in the commonly accepted currency correlations.  Several voting members at the ECB have highlighted weakness in their speeches, and for those closely watching the region’s fundamentals this is hardly surprising.  GDP growth rates for the Eurozone as a whole have been abysmal, barely holding support in positive territory.  The collective unemployment rate still stands at 11.3% and there is emerging evidence that the sovereign debt crisis has not been managed in ways that will allow the region to produce sustainable growth any time soon. 

Relative Performances

All of these factors should be lightning warning signals for those that are heavily exposed to assets that are backed by the value of the Euro.  Relative growth performances and the stated policy stance at the ECB suggest that the currencies counterparts are now in the position to start making long term gains, and it will be important now to watch price activity not only in Dollar-backed assets but in the Guggenheim CurrencyShares Euro Trust (FXE) and the CurrencyShares Japanese Yen Trust ETF (FXY), as well.  A good portion of the expected moves have already be seen in the EUR/USD currency pair, so it might even make more sense to start selling the Euro in favor of one of these other alternatives. 

Shorter term, volatility will likely center around any new commentary that is released by the ECB.  Economic data out of the Eurozone is generally not market moving but we could start to see some expectations given the current market conditions and the reduced liquidity levels that are starting to occur as we head into summer.  We have not really seen extreme Euro moves in the non-Dollar pairs, so there is clear scope for some significant activities in the Euro crosses.  So be aware of these possibilities as we head into next month.

By Richard Cox

© 2014 Richard Cox - All Rights Reserved

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