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Is the euro on shaky ground?

Adam Hewison at INO does a little technical analysis of the EUR/USD trends in a video at INO MarketClub. I have linked to the video below, but first a few words. Back in May, I wrote:

while there is currency revulsion now at work and the euro is selling off as a result, there is bound to be some serious short covering.  Since then, there has been a pretty sizable rally in the Euro. And while the huge uptick in EURUSD this morning was credited to the (false) rumour that the Greeks might consider leaving the Eurozone, clearly there was some short covering going on.

Andy [Lees]’s note about a 76% reversal of the 2008 down move in the euro suggests that we may eventually see a much larger reversal in the Euro than we have seen to date. And although I recently noted that the Euro was still overvalued on a purchasing power parity basis, nothing goes down in a straight line.

-Short Euro Liquidation

And to wit, the Euro did bottom two weeks later.

EURUSD_2010_07_19

So, what’s next? Are we going to parity as Gary Shilling suggests? That is unclear. Marc Chandler wrote last week:

If there has been one thing that has tracked the euro-dollar exchange rate, it has been the two-year swap rate between the US and Germany.  The last significant low was on November 23rd 2009 when it was around 62 bp in Germany’s favor.  The euro’s high for 2009 was recorded two days later.  The swap rate trended higher in the US favor reaching 33 bp—an almost 100 bp swing—on May 27th.  The euro bottomed two weeks later on June 7th

It has been moving back in Germany’s favor and now one is again paid to swap out of dollars and into euros.  It now stands at around 20 bp in Germany’s favor– a 50 bp swing in a little more than a month.

If this trend continues, the euro could run further to the upside, something Marc notes "is a retardant at precisely the moment in time when the region could use an accelerant."

On the other hand, Hewison does some technical analysis using the Fibonacci tool at MarketClub and he sees resistance at these levels for the Euro. He says "the recent sharp rally in the euro, up from the 1.19 level, may be coming to an end." Hewison also expects EUR-USD parity but thinks it will get there in fits and starts.

EURUSD_2010_07_19_fibonacci

Source: Is the euro on shaky ground? – Adam Hewison, INO Market Club

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.