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Markets Gang Up on the Euro!

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Markets Gang Up on the Euro!

Post by Sean on Sun Apr 06, 2008 1:10 pm

Today's comment is by Sean Hyman, Currency Director for The Sovereign Society.

Good Day Currency Traders!

Currency traders thought they had it made. But just as they got used to making their "easy money" one way bets on euro, the unkind markets stepped in and "spooked" them.

Let me explain. Yesterday morning, the European Retail Sales numbers unexpectedly dropped to -0.5%. Economists were only expecting a 0.2% drop - if that.

No one was expecting the Eurozone to turn out a negative number. Euro traders were floored. They ran for cover - dumping the EUR/USD.

Germany - the biggest country in the EU - registered a drop of 1.6%. This is when traders started to realize the U.S. economic slowdown has finally reached them too.

The British pound also dropped right along with the euro when Goldman Sachs lowered their earnings outlooks for U.K. banks.

Then the IMF released a statement that announced they had lowered their economic growth forecast to 1.3% from 1.6% previously.

Combine all of this information together and you have the makings for a rate cut in the Eurozone (as I've been predicting for some time). And just the fact that we could see one sent the euro tumbling.

Meanwhile, the Scene is Set for a Stronger Buck
Now when we go to the other side of the pond, data came out in the U.S. the very same day.

The ISM Non-Manufacturing Index (the Services Sector reading that accounts for 88% of the U.S. economy) numbers came out at 49.6. That's a little stronger than the 49.3 number last month. While this is still in the contraction level which is below 50, it shows that the contraction was slower than expected.

On top of this, the futures market in the U.S. now only predicts an 88% chance of a quarter point cut on April 30th and only a 12% chance of a half percentage point cut.

Combining both of those two pieces of data together and you've got a bullish outlook from the dollar's point of view. Yes, contraction exists, but it's not as bad as everyone thought. And the Fed may not be so liberal with their rate cuts this month. So that's also bullish for the buck.

The Euro Will Do Whatever the Data Says
This comes at a time when the euro is "priced to perfection." That means the euro will respond to whatever the data says it should do. The euro could remain in the stratosphere as long as the data was strong. But now that some dollar data is surprising to the upside and some European data is starting to surprise to the downside...that picture is changing.

This means a change is coming for the EUR/USD exchange rate. The euro may not plummet tomorrow against the buck. We're still in a bit of a transition phase. However, it's definitely coming.

I believe the euro will sell off broadly against most currencies, not just the dollar (but certainly against the dollar).

Once the fall starts, the euro will finally work its way down to the 1.46-1.50 level in the upcoming months.

Translation: If you've been shorting the euro, you'll be rewarded in the coming months.


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