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Euro-dollar outlook

So many reasons to sell the Euro against the dollar. Nevertheless we can expect a fall of the euro in the second half of 2011. The dollar should continue to remain for now a safe haven despite the monstrous imbalances in the US economy and because of the real risk of implosion of the euro zone.

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Without being an expert in trading the EUR/USD, it is clear that the range 1.3970-1.4950 seems sustainable and profitable in the coming weeks.

Whenever implicit or explicit attempts to quantitative easing (QE) resurface, do not hesitate to sell the dollar. So even if the mast FOMC of June the 22nd formalized the end of QE2, a hidden QE3 is in the pipeline and the euro dollar parity may reach very quickly 1.4715, an important Fibonacci retracement point located in 76.4% of the decline in 04/05to 23/05 from 1.4945 to 1.3970.

On the safe side, I will be a seller just before this level around 1.4680 or - never mind for market timing - the 1.4550-14650 area when uncertainties about the future of the euro area (mitigated by the Greek Parliament’s vote on the austerity plan, prerequisite for the continued payment of the EU-IMF bailout) will resurface, probably very soon

Concerning the sovereign debt issue I have two papers to be finalized these days

Euro zone bailout plans: origin and utilization

Back on bailout plans granted to countries in the Euro zone encountering severe fiscal deficits since May 2010. How are tens of billions Euros raised, what are they for, and mainly, are those amounts enough to re-establish the public finances and stabilize those countries (...)

1/ A little summary on the PIGS bailout from May 2010 to clarify things for readers lost and drowned in the billions.. and especially by explaining that this money does not exist (or created by the central bank or monetary resources from the IMF, or borrowed on the markets via debt issuance from the EFSF); explaining that this money is also used throughout water, explaining that this money only buys time, especially by explaining this money is used to make ends meet months or quarters of these states and also to recapitalize some banks of these states in a very clear position of insolvency otherwise

2/ A bit of history (20 years ?) on the defaults/restructuring with different historical scenarios (Russia 1998, Argentina 2001, Mexico 1994, Southeast Asia 1997) helping us to understand the current situation (even though the PIGS case is specific). And also to clarify as much as possible what is a credit event, which is not really easy when you see the whole subjectivity and hypocrisy that revolve around this notion in the case of the Greek debt.

To anticipate the major trends in the financial markets, it is essential to combine four types of approaches and methodologies: Analyzing the market psychology, fundamental analysis, complex capital flows analysis and finally technical analysis.
Mory Doré

Returning to the euro-dollar, over a 6-12 month, it seems that the structural disadvantages of the Euro may outweigh those of the dollar: risk aversion and flows outweighing the fundamental fundamentals and monetary policy mismatch, that should have been promoting the euro as a result of interest rates widening expectations between the ECB repo rate and the FED fund rate.

As I often repeat it to various audiences, to anticipate the major trends in financial markets (equities, short-term rates, long-term rates, currencies, commodities), it is essential to combine four types of approaches and methodologies. the oldest market that is the foreign exchange market is no exception.

These four approaches to trading and investments are :

- The assessment of market psychology and the good understanding of the risk aversion level of market participants

- Fundamental analysis through the publication of macro-economic indicators and the anticipation of monetary policy decisions of central banks

- Complex analysis of anticipating the market flow and the structure of positions of large players on the foreign exchange that are central banks, the big institutional and global macro hedge funds... Very difficult to predict but very profitable if we come to decipher some changes of behavior.

- Finally the technical analysis and more specifically Fibonacci, retracements movements levels in the upside or downside, I watch both short-term horizon over a medium to long-term.

So let’s bet on a return of the pair to 1.26 by the end of 2011. while this goal may seem unjustified from a fundamental point of view (cf interest rate differential ECB-FED); in terms of flows, we cannot anticipate much (except anticipating breaks in the behavior of Asian central banks in their exchange rate policy); by cons in terms of risk aversion due to come, the dollar should be able to appreciate against the euro and remain a safe haven despite the important imbalances in the US economy and because of the real risk of implosion of the euro zone; finally from a technical point of view, this medium-term objective of 1.26 corresponds to the 76.4 % major retracement of the 1.1875 - 14945 rise over the period of June 2010 - May 2011

It will therefore not be about being right two or three years early on the variation of the dollar and trading the fundamentals with the right timing. For it is true that the budgetary situation in the United States is probably the worst that can exist on the planet and the budgetary imbalances of PIGS are simply "ridiculous" compared to that.

But the Great Depression of dollar denominated assets is extended in time (no one knows when, maybe in the second half of this decade) for two main reasons

1/ The dollar will keep, rightly or wrongly, benefiting from its status as an international reserve currency with no competitor and substitute able to absorb the huge amounts of foreign exchange reserves invested on the greenback

2/ The Asian central banks will continue to accumulate for some time government bonds in dollars in their currencies reserves (due to economic model still based on the competitiveness of exports).

Mory Doré , July 2011

Article also available in : English EN | français FR

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