I don’t know about you, but I am sensing a positive shift in the collective psyche we call the “market.” Yes, the up and down of the three barometric indexes suggests my “sense” just might be premature, and I would be the first to tell you that this is possible. After all, I am not a psychic; I am just one drop in the collective psyche. Nevertheless, given the market movement in the face of recent weak economic indicators fuels my “inkling” that market sentiment has shifted from short-term negative to longer-term positive. One (just one) driver of this shift is the economic “recovery” of Europe.
Way back in May and June, the breathless media was reporting the imminent death of both the euro and euro zone. Today, we have the question below.
I have three open trades (shorts) eur/usd around 1.2990 and today it has gone to 1.3333, and people say it will soon touch even 1.3500!! Do you think it will come down again to my level in a week or two or three? Please explain and advise.
We’ve come a long way, baby. Anyway, I don’t predict market movement specifically, but I will offer a general sense of movement.
It appears that the U.S. economy is bumping along the road to recovery. Understandably so as the U.S. economy is, by a wide margin, the largest economy in the world. By comparison, China, a quasi-capitalist, planned economy, debt free, and continuing to stimulate its economy, is now the second largest economy in the world, but to be as large as the U.S. economy, it would have to increase 150%, give or take a trillion. The point is this – compared to the U.S. economy the Chinese economy is nimble with many more options, whereas the U.S. Congress is still arguing about a $30 billion small-business bill to stimulate job growth. The U.S. economy could be bumping along for a while because of our politics and the hoarding of business cash ($1.8 trillion).
On the other hand, the collective states of the European Union (EU) actually have a larger GDP than the U.S. (in two of three rankings). Since the countries of the EU are democratic, they have the same issues of ideological politicians shaping economic policy and business cash not going to work. Thus, the EU, like the U.S., is slow to recover. There is a difference, though. The EU is showing stronger manufacturing numbers than the U.S. and, perhaps more importantly, the big three countries of Britain, France, and Germany, all have announced plans to trim deficits and reduce debt, while the U.S has not. As long as they can do this without stifling their individual economic recoveries, we should expect the EU economic recovery will continue on a somewhat faster pace then the U.S. economic recovery.
So, ask yourself, what is one important driver behind the value of any currency? The answer is the economic and fiscal health of the entity the currency represents. Given that at this moment in time, the EU is demonstrating more fiscal and economic health than the U.S. and the EU and China have a strong trade relationship (strong EU sales to China), my guess is the euro will continue to show strength compared to the U.S. dollar. One caveat: uncertainty is still the predominant sensibility in the market, so be prepared for continued up and down movement, even if the peaks and valleys start smoothing out, as I believe they will.
Trade in the day; invest in your life …
