Dollar Strength And Euro Weakness
Tiho Brkan | Aug 21, 2014 11:19AM ET
Source: Short Side of Long
Quite a lot of interesting movements in the markets. As we can clearly see in Chart 1, the traded-weighted US Dollar Index has been pushing higher in recent weeks and now sits very close to posting new 52-week highs.
One of the major US Dollar strengthening stories has been the weakening Euro theme. Recent economic data, which I always state is rather lagging at best, points to a slowdown in the overall Eurozone. We recently got a strong hint that German economy is quite close to a technical recession, while French economy is struggling just as much. Once again, Italy has already entered a recession and the debt levels in the overall union continues to rise.
Source: Short Side of Long
It seems the market has already been busy discounting these developments. Currency investors have been selling down the Euro very consistently since the major daily reversal occurred in early May on the day of ECB press conference. It seems to me that the market participants are pricing in a potential further ECB easing policies, just as the EU economy weakens.
Does that mean, one should rush out and short the Euro? I am not so sure about that right now, even though I think Euro will be much lower in a year from now. Technically speaking, Euro has become quite oversold from the short term perspective, short positions continue to pile on and various sentiment surveys show that the current downtrend is very well “telegraphed” to all market participants. And when a trade becomes obvious to the public, it might be obviously wrong for the next little while, as potential mean reversion kicks in.
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