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How far can the Euro (and other currencies) fall against the Dollar?

29 October 2008

The Technical Trader’s view:


The drama of the Dollar is beginning to take centre stage in the markets.

The clear failure of the market to hold at the band of support 1.3668-1.3812 has led to a fall against the Euro which spells the end of the weaker Dollar move from 2000.

Our Key Trade subscribers have profited from the move.

And although we think it looks extended short-term, we think it will go further.

1.20 looks to be the first support of consequence.

The detail of the market shows a possible head and Shoulders pattern that looks set to drive the market on down – perhaps as far as 1.18 or so.....(close to the long run support in the weekly chart)

We have been profit-takers here (the recent leg almost exactly equal to the move from 1.60 to 1.39)

But note the good resistance above the market at the low 1.3261, and then again at the Neckline.

Even if it bounces we think the market is a sell.

The Macro Trader’s view:
Given an economy that:

• has been skirting recession for well over a year, driven by a housing market correction that began back in 2005,
• has enjoyed a sizeable fiscal boost earlier this year and more recently,
• has had to intervene in its financial sector in enormous size

one might be forgiven for asking why the Dollar is as strong as it is, especially since the on-off recession is now definitely not only on, but likely to prove deep and protracted.

The answer could simply be put as follows: ‘USA first in, USA first out’ but that wouldn’t fully explain what is now unfolding in the global economy.

True, the US was the first economy to begin feeling the impact of the Sub-Prime crisis. Its origin after all, was the US. But initially many thought it would just be a US problem, worsened by the housing market correction that began in late 2005.

That view enormously over-simplified the matter. The sub-prime bonds secured against sub-prime mortgages were purchased as investments by many other Banks globally; this insured the problem would be global in its reach.

But because the initial impact did indeed appear confined to the US, the Dollar weakened greatly against the other major currencies. The UK economy, which completely avoided the 2001 recession, was at first viewed as bomb-proof, although that view has long since changed. And the Euro zone economy, with its greater reliance on manufacturing rather than services/housing market activity, looked even more immune.

Now, a year of financial market turmoil and dislocation has almost brought the global financial system to its knees, requiring a global rescue plan designed to recapitalize the Banks of the major economies. No economy looks immune and indeed a severe recession is not only expected in the US, but also in the UK and now the Euro zone.

So, although the situation in the US is far from showing improvement, traders are focused on the relative deterioration of the other major economies as measured against the economy of the US and they don’t like what they see. Hence the US Dollar is now embarked firmly on a new Bull Run which has still a long way to go.

How far can it go? Well, just look at where Dollar Euro was before the Dollar began the its recent bear trend, now ended, and that will give some guidance.

Subscribers to the Macro Trader’s guide and the Technical Trader’s guide and Seven Days Ahead’s Key Trades product have benefited from our detailed analysis of this market and only today taken a 583bp profit.

Mark Sturdy
John Lewis
Seven Days Ahead

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