How Low Can the Euro Go?

If you read my market commentary, you know that I went into 2015 expecting to buy the euro and hold precious metals.

Neither prediction has paned out (thus far), but rather than covering the issue with a veil of silence, I thought you’d appreciate an update.

Gold Rally Cut Short

Early warning signals in January (sentiment, seasonality, Elliott Wave) cautioned that the gold rally may terminate prematurely. Via the January 27 Profit Radar Report, I recommended selling gold positions for gains as high as 13% (see ‘Gold Seasonality and Sentiment Turned Frosty’ for more details).

Gold may carve out a double bottom and we may get a second bite of the cherry in coming days/weeks.

What about the euro?

We bought the euro on January 23. Ways to play the euro include euro futures, EUR/USD or CurrencyShares Euro ETF (NYSEArca: FXE).

The euro rally looked promising initially, but failed to summon the momentum needed to break higher.

The February 28 Profit Radar Report warned that: “The euro continues to trade sideways. This is looking more and more like a bearish triangle, which would require a thrust to new lows.”

The accompanying recommendation was to either close euro positions at breakeven, or hedge them with the PowerShares DB US Dollar Bullish ETF (NYSEArca: UUP).

I’m not bucking the down trend yet, but still believe that the euro will rally for much of 2015.

If things go ‘according to plan,’ the euro should find support around 1.07 – 1.05 (watch the green support line) and rally from there. A new RSI low (lower panel) would alter this expectation.

In summary, although the euro rally did not materialize (yet), we exited the January trade without damage, and we were actually able to grab some nice profits from the gold trade. The renewed selloffs should offer another buying opportunity soon.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

The Biggest Trap of European QE

The cat is out of the bag. The ECB will buy up to euro60 billion a month from March 2015 to September 2016. Purchased assets will include government bonds, debt securities by European institutions and private-sector bonds.

Why? Eurozone inflation is negative. Deflation is bad news, and pumping money (QE) into financial markets is hoped to fight deflation and spark inflation.

Inflation, by definition, erodes the value of a currency. The obvious conclusion; eurozone QE should send the euro lower.

But if something is too obvious, it can obviously wrong.

Let’s take a look at what U.S. QE did for the U.S. dollar.

The chart below plots the U.S. Dollar Index against the various QE programs.

QE1 saw wild dollar swings, but no discernable down side bias. In fact, the dollar rallied when QE fist started.

QE2 didn’t sink the dollar either and the greenback actually rallied during QE3/4.

Headlines like ‘Why quantitative easing is likely to trigger a collapse of the U.S. Dollar’ proved incorrect.

The euro lost 18% since May 2014. This is one of the most pronounced declines in recent history.

In 2008 the euro lost 23.1% before bouncing back, in 2009/10 21.5%. Technical support for the euro is not far below current trade, so shorting the euro is akin to picking up pennies in front of a train.

Contrary to conventional wisdom, investors should put the CurrencyShares Euro ETF (NYSEArca: FXE) on their shopping list and start exiting the PowerShares DB US Dollar Bullish ETF (NYSEArca: UUP).

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Smart Money is Buying Euro and Selling Dollar

The euro has been more or less in freefall mode since May 2014. Downside momentum increased even more this week.

Nevertheless, commercial traders, industry experts with deep pockets, have been buying the euro.

The chart below plots the euro against net long positions (as percentage of open interest) by commercial traders (data source: Commitment of Traders Report).

As the red lines illustrate, commercial traders are often early, but eventually proven correct. Sentiment is favorable to look for a euro bottom.

The EUR/USD chart shows the currency slicing through support levels like a knife through butter.

Despite the euro’s renewed freefall since the beginning of 2015, RSI has not confirmed the new lows.

There are a couple of support levels around 1.18, so based on sentiment and technicals it is possible that the euro will carve out a low and stage a significant multi-month retracement rally.

ETFs that benefit from a change of trend are the CurrencyShares Euro ETF (NYSEArca: FXE) or PowerShares DB US Dollar Bearish ETF (NYSEArca: UDN).

Leveraged ETFs are available, but are thinly traded.

A euro rally will obviously affect commodities like oil, gold and silver.

Continued updates will be provided via the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.