Euros rally in the last 7 months has been nothing less than spectacular – soaring 13% since the start of this year. Quite surprising for a currency that was widely talked about reaching parity to the US dollar around the latter part of 2016. Well, euro parity to US dollar was largely speculative and a market excess (had regularly shared this view with all my market participants). My sense for EURUSD near 1.19 is quite similar – just that the direction is reverse – it has become a market excess.
Analyze the following facts before we become euphoric about euro (just like we were euphoric about dollar some 8-9 months back).
- As per the latest GDP growth rates, US clocked a 2.6% growth while the large European nations (Germany, France and Italy) are growing at 0.5% – 1%.
- The US Central bank has increased interest rates thrice (Dec16, Mar17 and Jun17) while ECB is still persisting with interest rates close to zero.
Considering the above, do we really need to debate what looks more promising?
Beyond growth rates and market economics, euros gain looks more on the account of dollars weakness than euros strength (courtesy dramatic exits from Trumps administration and various allegations/investigations about Russian role in Trumps win).
Well Mr. Victor, markets have rewarded the euro. What do you have to say to that?
Too large a reward now, akin to the severe penalty 8-9 months ago.
Technically, euro is largely overbought. Momentum indicators provide adequate evidence. Upward moving trendlines on the daily charts are getting steeper and steeper – notice the blue coloured lines in the chart below. Another indication of a euphoric state. In liquid financial markets, euphoria does happen, but rarely sustain.
Euro has outperformed its European counterparts, namely British Pound and the Swiss Franc, by a big margin. Have a look at the rebased chart below. Notice the red line (Euro) along with the green line (Swiss Franc) and the grey line (British Pound). Another comparable asset to Euro that has matched its gain is Gold (XAU) – the blue line.
My sense is that the euros gain has overrun. Levels around 1.19 and the big whole figure of 1.20 are critical long term resistances. Sell EURUSD for a target of 1.14 – 1.15, stop at 1.2020.
Euro exporters should hedge their receivables around 75.50 – 75.80 range.