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EUR: Is This Trend Sustainable For the Long-term

By Benny Nardino | April 14, 2008

The EUR upward surge in the face of a down-beat global economic climate is one of bemusement. In forex trading there are many factors to directional movement. At a time when the macro economic data does not tally with the rally we shall investigate the whole spectrum. The question is, “What has been the intrinsic prime-mover in the EURo zone?”

In recent weeks I have almost become the lone voice looking at the technical positions of the two biggest economic currencies EUR/USD pair. The chart above is a 20-yr analysis of the against the dollar and every previous highs have been broken. When will the tide turn?

The euro zone economy is not as straight forward as that. Primarily because every EU nation is still have their own agenda. Not so long ago the US have been racking up her foreign debt because of the terror wars in Iraq and Afganistan. The world have not shared in her burden, (not as much as they would have liked).

The domino effect was further borrowing from foreign investments and reserves in the US economy. With mounting debts and interests acruing confidence in the US economy began to wane which culminated diversification out of the US soil into other reasonably stable economies like the EURo and the Swiss. This global chaos that has been brewing have seen new tides sweeping the marketplace.

Diversification stem from the US economic weakness sets off gold price more than doubled in the last five years. In fact, correlated currencies like swissy, CHF, Canadian, CAN and Aussie dollars, AUS have all gained significant grounds on the USD. Some have even attained parity at some points.

There is also the push for global eco-friendliness which on the other hand is escalating global food prices. You may be wondering how. Corn, wheat, maize and many of these arable foods are being processed for bio-fuel as energy demand soars. The resultant effect has been food shortages especially with drought in some parts of the world like Australia.

Rising costs of crude oil on the other hand, could not be exonerated. Although this was partly due to the dollar weaknesses and natural disasters all these factors did nothing but help create further dollar weakness. The recent housing debacle, credit crunch created further economic erosion draining any confidence left. The UK with a closely link economic model and operation had also suffered similar fate.

With these global economic challenges all the EURo zone had to do was sit and wait why the world sweat it out. There have been several ideas percolating the marketplace for the surge. One of interest was a piece I received from Morgan Stanley last week. In it, Stephen Roach, Head Economist, Morgan Stanley, cited that “.. the world have also been reducing their financial ‘home bias’ by diversifying out of their own domestic asset markets. The European … have diversified more within the Eurozone than outside the Eurozone.”

However, there are those who believe the EUR should be heading one way. People like the ECB President - Jean-Claude Trichet. But you have to look at the current reality. If they don’t act fast on measures to start bringing the EUR to acceptable market levels, Euro zone manufacturers would start feeling the pinch. 1.40/44 were level one would have anticipated consolidation four/five months back. I believe it is time to eradicate false balance from the EUR/USD pair to allow for reasonable correction. Talking up the euro by ECB president in the face of the global economic atmosphere is nothing but false hope.

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