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Has anyone of you experienced that sinking feeling when you feel all is lost and you are on the verge of giving up all hope.
This is what happens when you trade the (excuse my language) god-forsaken currency -The Euro. Right from the inception the euro has known only one direction-down. But the moot point is that is it really the case that the market looks warped or does it truly reflect global macro-economic fundamentals. Lets look at the big picture.
When the ECB with the help of the G-7 had intervened for the first time in the forex markets on 22nd Sep,2000(which incidentally was the anniversary of the Plaza Accord) I still remember the day when in about 10 minutes the Euro shot up more than 5 big figures from 8500 to 9000.Champagnes popped out , but by the time we recovered from the hangover the Euro was back on its way down, this time to make a historic low of around 8200.
At first glance this seemed like a slap on the face of the ECB by the foreign exchange markets. But by the end of December the Euro had staged a vicious recovery, mauling the dollar as well as the yen and clawing its way out of the bear hug, and zooming all the way up to 9600.Wow! That's what I call a rebound.
So now the question remains what happened to that rally, why did it fizzle out, and why dint it reach parity , the figure that was being bandied around by every analyst worth his salt.
First the Euro turned the corner , after the release of the 3rd quarter 2000 US GDP data , which was extremely weak and fell from 5.6% to 2.10% q-o-q. The trade deficit had ballooned to $33.55 billion. So a slowing economy combined with the profit warnings from leading blue chip companies., made Euro the darling of the markets.
There were a host of other reasons like the corporate yield spreads over the treasuries were quoting at record highs (indicating increase in corporate bankruptcies). Then there was the presidential election mess, which saw , a further erosion of international confidence in dollar assets . The stage seemed perfect for a Euro recovery , and that is what it did .
So the crucial point is that though the Euro economy seems resilient and looks to achieve a 2.6% growth in 2001, compared to a 1.4% for the US(which looks frugal , when one considers the latest first quarter GDP results , suggesting a growth of 2%), it is not immune from the slowdown , and its rally was based solely on dollar weakness rather than inherent Euro strength.
Now with the Euro back at 8800 levels what does the market expect. The key to the answer is the ECB. So we need to look closely at the ECB and the principles governing it .The uppermost in the mind of the ECB and its guiding light is "Price Stability".
Contd... next page
* The author is a Head Trader at Wall Street Global Opportunities Fund
Disclaimer:
The contents of this publication should not be construed as an express or implied promise , guarantee or implication by any of the Wall Street Group of companies that you will profit from the strategies herein or that your losses in connection therewith can or will be limited .
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