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There was a lot of talk in the media last year about the Euro replacing the US Dollar as the Number One currency of choice in the world. The Euro climbed in value to around 1.6000 US Dollars, based on a lot of negative news for the United States economy.
Chart 1 below shows the Euro futures contract (EC-Spot in ProfitSource).
Chart 1
click to enlarge
Because each currency is valued against another currency, this chart represents the value of the Euro against the US Dollar. If the US Dollar is weakening, we would expect the Euro to rise in value, unless the Euro is also weakening.
You can see that from late 2005 to July 2007, the Euro had been trending strongly upwards. In the months following February 2008, the uptrend accelerated with a large amount of negative news coming out regarding the US economy and the US Dollar.
At the same time, nothing was said about the health of European economies, so the obvious move by traders was to buy Euros. Because of this scenario, the Euro was “overbought” in my opinion, rising higher and faster than it really should have.
When news started to come out mid way through the year showing that Europe had problems of its own, the market corrected itself, falling sharply. Even though we had a major crash, with the Euro dropping close to 4000 points over the past months, I would argue that it has simply returned to where it should have been in the first place.
I think in the year ahead we will see the Euro overtake the US Dollar as the currency investors turn to as a “safe haven”, if such a thing still exists in times like these.
The current market action is unfolding in a similar manner to the last major bear market low in November, 2005 on the Euro. In Chart 2 below, I have used the Split Screen mode in ProfitSource to analyse these two periods of the market side by side.
Chart 2
click to enlarge
The chart on the left shows the movement out of the November 17, 2005 low while the chart on the right shows the current market action, as we move away from the late October lows.
If these levels can hold moving into 2009, then I would expect the Euro to work its way back up to around 1.50 next year.
These periods of the market after sharp falls can be difficult to trade, as they are volatile and choppy. In the past month, we’ve seen the Euro trade in an 800 point channel, so care must be taken when looking to get set in this market.
I am confident that once the market has consolidated, we will see a strong move up lasting several years, as the US Dollar weakens and the Euro continues to gain in strength.
I would be surprised if the current lows in the market did not hold.
Be Prepared!
Mathew Barnes
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