Euro’s reversal of fortune & outlook
This post is a guest contribution by Dian Chu, market analyst, trader and author of the Economic Forecasts and Opinions blog.
The Euro closed up Friday`s session at 136.13, and looks poised to make a run up to test the 140 level in February. I, among many, was thinking the Euro would next test the 125 level, and things started heading well in that direction with the Euro moving down to 129, and appearing on a downward slope.
So what happened? Well, there have been quite a few new developments that prompted this reversal of the euro fortune.
PIIGS Bond Sale Surprise
Furthermore, China and Japan had both publicly stated that they would be buyers of these risky European Country Bonds. So any shorts expecting a European collapse because of these much anticipated bond auctions failing miserably had to cover fast when the opposite occurred.
A Hawkish ECB
This really illustrated the difference between ECB and the U.S. Fed–ECB`s sole mandate being to ward off inflationary pressures, versus the FED`s dual mandates of monetary policy being governed by unemployment levels and inflation concerns.
… And A Dovish Fed
If you listen to all the language coming out of the Fed minutes, they have always stated that rates are going to be left extraordinarily low for an extended period of time. This type of phrasing has left many analysts with the opinion that the unemployment level would have to get somewhere near the 6.5% levels before Bernanke would even consider raising rates.
With a major election coming up in 2012, the focus of the Obama administration and everybody else trying to get re-elected will be lowering the unemployment rate at all costs, even if we have to stomach a little inflation along the way.
So, about as hawkish as the Fed will be in 2011 towards inflation concerns is not initiating a QE3 campaign. So it is quite logical that between the two central banks, ECB will most likely be the first to raise rates, and by far the more hawkish when it comes to monetary policy over the next two years.
Hot Money Flowing To Europe
After emerging markets had stellar returns in 2010 with the likes of Singapore and South Korea, it appears that the fund managers are moving some of their money into Europe with the belief that because of the over-hyped debt concerns of 2010, that European assets are currently undervalued and at a discount to emerging market assets.
Hot money coming into Europe is extremely bullish for the Euro.
Germany’s Really Kicking
Spain Cleaning The Banking House
This is the type of proactive governmental response that was lacking in 2010, which was always behind the curve, and only pushed into action by market forces. The fact that European leaders are learning their lesson and trying to get ahead of the bond vigilantes in 2011, which manifests itself in lower financing rates, is very encouraging and bullish for the Euro as well.
Euro United Bonds We Stand
So, it appears that a common eurozone bond will finally occur sometime in the next few months, probably by March of 2011 at the latest, as the final terms are being worked out and negotiated behind the scenes, as well as the financing benefits that this accord will bring to the European Union.
Regain the Reserve Currency Status
This notion was seriously questioned by many pundits and analysts alike during the height of the 2010 debt crisis. Many believe the entire notion of the European Union was flawed because they could never act as a cohesive body, and implement structural reform measures to address individual weaker member countries financing needs.
This euro bond solution appears to be meeting this criticism head on, and will go a long way in reinstating the Euro as the second reserve currency. This bullish is very bullish for the Euro, and will ultimately push it well beyond the 140 level once this confidence in the Euro is solidified and sustained for a period of time.
This is why we are experiencing a trade out of gold in terms of the Euro, as investors who were worried that the Euro was going to collapse went into Gold as a safe haven trade. This trade reversal is also bullish for the Euro, and has really only begun.
Stronger Euro = Weaker Dollar
From Parity To 160 in Six Months?
In fact, the 160 may come much sooner than was ever envisioned back in the summer of 2010 when all the experts were calling anything from complete dissolution of the currency, to parity, or at best the 115 level to the US Dollar. (See Technical Chart)
It is amazing how financial perspectives can change in as little as six months in the investment marketplace. Nonetheless, here are some ETF ideas for individual investors to go with the new euro trend – WisdomTree Dreyfus Euro (EU), CurrencyShares Euro Trust (FXE), Market Vectors Double Long Euro ETN (URR), Ultra Euro ProShares (ULE).
Source: Dian Chu, Economic Forecasts and Opinions, January 24, 2011
More on this topic (What's this?)
Stock Market Down as Greece Talks Collapsed on Sunday (Jutia Group, 6/15/15)
Soros on the Euro (Crossing Wall Street, 6/4/12)
The Cost of Greece Exiting the Euro (My Wealth Builder, 6/24/12)
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