Don't Chase the Euro, Wait for a Bounce

The euro dipped below the $1.30 level, but losses below there were shallow. This is and has been a crowded trade, but the $1.30 level was the objective of many and the price action feels a bit like the end of a boxer's punch, when it loses much of its sting.

To be sure, I remain a euro bear. European officials have lost a degree of credibility. The EU/IMF plan was not bold. If it were bold, there would be not question about whether it was sufficient. European officials are still in denial, or seemed to be before today. No reason for contagion? Really? No convincing effort to get ahead of the market expectations, such a preemptive package or facility for other countries, like Portugal. The ECB has backtracked a couple of times from positions Trichet initially staked out. This does not bolster credibility, even if his capitulations were economically necessary.

Initial resistance is seen near $1.3050. A move above there may see additional short-covering as the market may begin suspecting some sort of stronger response. The ECB meets Thursday, appropriately in Lisbon. A move above $1.3150 is probably needed though to encourage momentum players to reduce short positions, which at the IMM were record levels (among non-commercials). Hourly momentum studies are showing a positive divergence and this would be consistent with further upticks off the lows.

Again to avoid confusion, there is medium term potential for the euro to return to its birth-rate, which roughly corresponds to the OECD's purchasing power parity measure and the 10-year moving average. They call come below $1.20.

I note that many who expect the EMU to disintegrate are talking about parity. I do think the EMU strengthens with institutional reforms (and more surrendering of sovereignty) on the other side of the crisis, but even a move to parity next year cannot be ruled out. The euro has spent several years above fair value. In lieu of domestic demand, the euro zone may welcome an orderly depreciation of the euro to help boost foreign demand for its goods and services.
Don't Chase the Euro, Wait for a Bounce Don't Chase the Euro, Wait for a Bounce Reviewed by Marc Chandler on May 04, 2010 Rating: 5
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