The euro reached a new four-year low on Monday, May 17, 2010, and the June euro futures hit a new contract low after declining three percent last week. While many analysts believe the euro is getting oversold and could bounce, I don’t see a real bottom in sight just yet. The euro has now fallen five of the past six trading sessions.
When the euro was trading at $1.33, many analysts felt the short side was overcrowded, but here we are even lower–with fears still high about the future of the Eurozone. The euro has bounced off its lows, which I believe is tied to profit-taking. We still have European debt concerns weighing on the market, and the European economy.
The $1 trillion bailout European policymakers announced last week to prevent debt defaults in weaker Eurozone counties including Greece, Spain and Portugal hasn’t alleviated investor fears about the region. Some European companies will benefit from a weaker currency, as sales abroad get a boost. So that’s the good news behind the weaker currency, but I believe what we are seeing now in the euro is no bottom in place.
Sharp spending cuts are likely to create an economic slowdown, however. Fiscal cuts in Greece have triggered riots there, and Spain and Portugal also recently unveiled sharp spending cuts, pledging to slash wages and raise taxes. Italian officials are also considering a sharp reduction in spending and France is expected to submit spending plans this week.
Shifting central bank policies regarding bond purchases has also contributed to a lack of faith. Investors cited the European Central Bank’s (ECB) initial refusal to consider asset purchases as one reason for the May 6-7 market downturn, which included the biggest drop in U.S. stocks in 14 months. After a week of more market turmoil, the ECB reversed its withdrawal of emergency steps taken to tackle the global credit crisis, saying it will again offer banks as much cash as they want for terms of three and six months.
The ECB has started to buy debt securities to address tensions in some market segments. They are trying to put more money into circulation, similar to the situation in the U.S. during the financial crisis of 2008-2009.
We’ve seen foreign banks borrow about $353 billion from their U.S. offices during the past three months, which represents the largest quarterly percentage rise in three years. Eurozone bank borrowing from U.S. counterparts has caused three-month borrowing costs to rise to their highest point in nine months.
You want to be careful trading this market, as you can see the volatility in the 15-minute chart. You can see how the volume was pretty light during the overnight session in the middle of the screen, rising briefly as the market hit new lows, then spiked again as the market peaked during the morning of May 17.
Looking at a daily chart, I don’t see a bottom yet. I expect a slide to $1.20 in the next couple weeks, but it could come in a day if we get more bearish news. If you are interested in buying euro futures, I recommend waiting for this market to form a base.
Not only do we have continuing fear about the European debt crisis, the outlook for the U.S. has improved along with the dollar, which will put pressure on the euro. We have some analysts calling for the euro to fall to $1.15 by mid-2011. UBS just cut their estimate to $1.10 in 2011 from $1.25, as the market blasted through that level.
New York University Professor Nouriel Roubini said in a BBC radio broadcast this week that the eurozone is facing “a second stage of a typical financial crisis” and that “there’s a question mark” whether governments will follow through with necessary fiscal austerity measures.
If you want to trade this market, use caution, and exercise proper risk-management. I would probably recommend stepping aside for now and waiting for developments to flesh out a bit. Watch for technical signs that a bottom is in. If you are interested in playing the short side, you might want to wait for the euro to correct back up to $1.27 – $1.28. Since this market is so volatile and news headlines have been affecting it daily, trading this market can be challenging. Please feel free to you contact me to determine an appropriate strategy based on your specific situation and timeframe.
Steve Kauppi is a Senior Market Strategist at Lind-Waldock. He can be reached at 866-317-9477 or via email at skaupi@lind-waldock.com.
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