gauging the risks of dollar euro 2nd ig

8/3/2019 Gauging the Risks of Dollar Euro 2nd Ig

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UPDATE

FundamentalTechnical

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2nd December 2011

Gauging the risks of Dollar/Euro



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Technical

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Disclaimer

D 2 00 8 M A M J J A S O N D 20 09 M A M J J A S O N D 20 10 M A M J J A S O N D 20 11 M A M J J A S O N D 20 12

1.16

1.17

1.18

1.191.20

1.21

1.22

1.23

1.24

1.25

1.26

1.27

1.28

1.29

1.30

1.31

1.32

1.33

1.34

1.35

1.36

1.37

1.38

1.39

1.40

1.41

1.42

1.43

1.44

1.45

1.46

1.47

1.48

1.49

1.50

1.51

1.52

1.53

1.54

1.55

1.56

1.57

1.58

1.59

1.60

1.61

1.62

1.63

1.64

1.6017 High

1.4941 High

1.3149 Low

Euro - US Dollar

20 27 4

July

11 1 8 25 1 8

August

15 22 29 5 12

September

19 2 6 3 10

October

17 24 31 7

November

14 21 28 5 12

December

1

1.305

1.310

1.315

1.320

1.325

1.330

1.335

1.340

1.345

1.350

1.355

1.360

1.365

1.370

1.375

1.380

1.385

1.390

1.395

1.400

1.405

1.410

1.415

1.420

1.425

1.430

1.435

1.440

1.445

1.450

1.455

1.460

1.465

1.470

1.475

1.480

1.485

1.490

1.495

1.500

1.505

1.3841 Low

1.4576 High1.4534

Diagonal from June 2010 low

1.3149

1.3425

Euro - US Dollar

Where now for Dollar/Euro?

WEEKLY CHART

The market is re-approaching the

recent low at 1.3149 having failed to

break back through the rising

diagonal at 1.42.

A break of the 1.3149 low would

begin fresh selling.

DAILY CHART

The day chart shows the market’s

hesitation above 1.3149.

And in particular the push back up

through the falling diagonal and

small horizontal resistance at1.3425.

But besides these small intimations

of short-term bullishness, there areno compelling patterns at work.



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FUNDAMENTALS:

The Dollar has recently enjoyed a period of strength against the Euro as theEurozone sovereign debt crisis intensified and as the Euro zone approachesrecession. Both events would pose a significant threat to the health of the global

economy.

Despite several European and G20 summits, a solution to the crisis continues toelude the bloc’s political leaders. So countries outside the Euro zone are starting tomake contingency plans in case the worst happens.

With France and Germany desperately trying to find a formula to deal with theproblem, but failing to fill in the all important detail, the Euro has remained under

downward pressure.

The crisis has also had a significant impact on inter-bank lending, which is a keysource of short-term finance for the banks. Banks have become reluctant to lend toone another for fear of not getting their funds back in the event of a sovereign andbank default.

This has driven up wholesale money market interest rates and further worsened theavailability of finance to businesses and individuals amplifying the chances of arecession.

Indeed the OECD this week said Germany was already in recession, and ratingagencies are saying the sovereign credit ratings of all the Euro zone nations are atrisk of downgrade.




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FUNDAMENTALS: CONTINUED

Fearing complete paralysis in the financial markets the world’s leading central banks, ledby the US Federal reserve, stepped in yesterday to increase their bilateral swap

arrangements with the Fed slashing the interest rate it charges on special dollar liquidityfrom 100bp to 50bp.

The reaction in the markets was swift: the Euro and equity markets rallied as traderssensed the authorities were at last co-ordinating their efforts in an attempt to keep creditflowing.

However these moves, as welcome as they are, can only have a limited affect. Thesupply of liquidity to the banks has been improved, but the inter-bank money marketneeds to start functioning normally again.

Moreover, the sovereign credit crisis remains unresolved. Yesterday’s central bank actionwas a sticking plaster over a much deeper wound.

The Germans remain committed to treaty changes that they judge will prevent anothercrisis such as this ever happening again, and are pushing for closer fiscal union with acentralised budget watch dog with powers to punish countries that break the rules on

spending and borrowing.

But all of these plans require detail and take time to implement, meanwhile the currentcrisis requires urgent action.

We judge yesterday’s rally is of limited longevity and once the impact of the move wearsoff, the Euro may resume its slide against the Dollar as traders refocus on the chances ofthe worst-case scenario of a Euro zone break up actually occurring.




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gauging the risks of dollar euro 2nd ig

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