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“The trend is your friend.” I’m sure you’ve heard this market adage a thousand times before. And the wisdom behind that saying has, more often than not, proven absolutely correct. It’s a lot easier to profit when you have the wind behind your sails.
When it comes to currencies, the trend has been “dollar down, euro up.” For about the last five years, in fact, traders have been getting out of greenbacks and going international.
If you’ve been tracking the dollar’s performance for that long, you know this anti-dollar, pro-euro theme really gained widespread traction last year. And today it has reached a fever-pitch.
Market practitioners the world over have jumped on the bandwagon. So far, they’ve been dead-on with their oft repeated theme.
But something dramatic happened last year, something that laid the foundation for a major trend change.
I’m talking about the subprime surprise!
You know the story by now — the entire U.S. real estate market is collapsing, driving the economy to the brink of recession. Still negative for the dollar, right? Yes.
But the mess is washing across the Atlantic Ocean right now. Exotic derivatives have turned global credit markets upside down. That raises a critical question …
Can Other Currencies Continue Their Hot
Streaks in the Face of Spreading Weakness?
For some time now, I’ve been telling you that I expect the British pound to weaken. If you want the specifics, see my past Money and Markets issues. But for now, let me simply highlight a key quote:
“The U.K. economy and the current market environment bode ill for the currency.”
Since I first laid out that forecast, the British pound has begun down the path towards disaster.
As I suspected, economic sickness has spread to the United Kingdom. And the Bank of England has taken action to help limit the contagion.
IMPORTANT: I now think there could be another currency close on its heels — the euro.
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| Jean-Claude Trichet and the European Central Bank could soon start cutting rates. |
As I mentioned a moment ago, the euro has been the market’s dollar alternative. Investors shoveled money into euros as their confidence in the greenback diminished.
Consequently, it’s been an easy race for the euro since the start of 2002 — the currency gained roughly 74% against the buck.
But here are two reasons why I think the trend may be about to reverse:
Reason #1: There are signs of economic trouble brewing in Euroland!
Sure, the European Central Bank announced on Thursday that they decided not to adjust interest rates. But traders didn’t care! Why?
Earlier in the week, an index measuring Europe’s service industry notched its slowest pace of growth in the last four years.
That was enough to convince traders that a slowdown in Europe IS imminent, no matter what the ECB is saying or doing. If anything, smart traders will position themselves so they’re ahead of rate cuts in Europe, which are looking more and more inevitable.
Reason #2: The euro’s technical picture is deteriorating!
Look at a daily chart of the euro versus the dollar, going back one year. It seems that the euro may be running out of steam.
See those three recent high points? They look very much like a triple top pattern, and suggest big downside risk in the euro right now.
And if the future for the euro is clouding up, that means things are likely clearing up for the buck. Remember, when money comes back to the center, it will come back to the dollar.
Bottom line: While there might be more weakness ahead for the U.S. economy and its stock market, currency traders may very well get on their horses now and start running from the seemingly overvalued currencies that are leveraged to global growth — currencies such as the euro.
Stay tuned!
Best wishes,
Jack
About Money and Markets
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, Tony Sagami, and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Adam Shafer, Andrea Baumwald, Kristen Adams, Maryellen Murphy, Red Morgan, Jennifer Newman-Amos, Julie Trudeau, and Dinesh Kalera.
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