March 02, 2010

All Eyes On The Euro

Severely tested by Greek sovereign debt concerns and an increasingly bearish mood among big hedge fund traders, the Euro has been loosing a lot of steam versus the US Dollar in recent months.  Most eyes have been on the EUR/USD currency pair and expectations are high that the Euro will slip further against the Greenback.  Some traders in the hedge fund community are banking on a return to parity in the coming months.

While the bearish Euro sentiment continues to focus on the major currency pair EUR/USD, unbeknownst to many eyes, the Euro weakness is much more apparent versus other currencies, most notably the Australian Dollar. The Euro weakness has been equally apparent when pricing certain commodities in Euros.  For instance, Gold priced in Euro hit an all-time high of €836.67 today.

On the back of the Australian 0.25% rate hike early this morning, the Euro fell to a low of 1.4966 against the Aussie $, a level not seen since 1997.  The currency pair is now only 1 cent (1000 points) away from the all-time historic low of just above 1.4.  More importantly, as the chart below illustrates, the Euro has lost 25% in the past 12 months and it has done so in a rather concerning one-way move to the down-side.


Against the backdrop of all this negative sentiment, it has become difficult to find a compelling reason to be bullish on the Euro.  However, the longer-term trend versus the US Dollar is still far above some major bullish trend lines.


In assessing further Euro weakness, I think it is important to keep a closer eye on the EUR/AUD rather than EUR/USD.  The fundamentals in Australia appear to be stronger than those of the US as well as the European Union.  Considering the recent rate hike, a bigger interest rate differential is very tempting for further carry trades.  Beware however, that the Australian Dollar, being a commodity currency, trades more volatile than many other major currencies.  Assessing risk-reward scenarios is important as always!

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