Euro Going Up The Hill?
IFC Markets | Sep 01, 2015 08:20AM ET
Over the past month the European currency has become the absolute leader of growth having advanced 4% against the basket of the developed countries currencies. The risk averse investors resort to the Euro as to a safe-haven currency. Amid this, financial analytics give notice that it is time to see the countermeasure from the ECB as the Euro devaluation is the primary instrument of Mario Draghi’s institution to stimulate inflation. Will the sharp rise of the Euro prove to be fundamentally unreasonable and may it be replaced by the even sharper decline? In the mid-term (month, quarter) the Euro aims at the equilibrium range. Its value is determined firstly by the fundamental factors of the EU and the eurozone economies. The range width is a result of the ECB regulative actions. As the most significant economic indicators (GDP, unemployment, trade balance) lead a quarterly trend, they can be considered permanent in the short term (several weeks/month).
Lets consider the spread between the Euro and the portfolio of three European indices: FTSE 100, DAX and CAC 40. The portfolio weights are chosen proportionally with the contribution of the British, German and the French economies to the EU GDP: 19%, 14%, 14% respectively. The spread is built on the basis of the cross rate model in NetTradeX platform, GeWorko interface. We noticed that the regulator interferes into the economy during the last 15 years in two cases: the economic “overheating” (inflation), or the slowdown and the risk of falling into recession. Each interference brings the spread back to the range. Presently, the Euro is underestimated to the portfolio indicator. Whatever regulator and its official representatives say, we will treat the Euro positively bearing in mind the following words of Alan Greenspan: “I know you think you understand what you thought I said but I'm not sure you realize that what you heard is not what I meant”. The technical signals of the spread indicate the Euro recovery against the stock markets. The regression level is at 2.75618 and it may be considered as the equilibrium level. This means that on the assumption of the current volatility level we shall expect the continuation of the Euro strengthening within 2-3 weeks.
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