Thursday, March 21, 2013

things can always get worse - but will they?

Here is a daily bar chart of the euro priced in dollars.

The EUR.USD is very much on the markets' mind now with the Cyprus banking system hanging by a thread. But after a downard adjustment to this news last Sunday night the euro has managed to hold its own as mini-waves of optimism and pessimism have washed across the markets.

I think this steadiness in the euro in the face of bad news is interesting for three reasons. First, the market has dropped for nearly 7 weeks from its early February top. Second, this decline has brought it to a point slightly below the midpoint of the rally from the July 2012 low (blue line). Third, the spring equinox is upon us. According to Paul Montgomery of contrarian Time Magazine cover fame this year's equinox is likely to bring the lunatics out in force this week and next, giving us volatile markets and making a dramatic change in market sentiment more likely now than at other times.

And all of this is occurring in a monetary context which suggests to me that the euro is going to  appreciate against the dollar because ECB monetary policy is much tighter than the Fed's. My conservative upside target is 1.40.

So I have a strong suspicion that this chart is going to look a lot different a couple of weeks from now. I think a big rally is about to start. The first sign of an up trend in the euro will be a move above the 20 day moving average which appears in this chart as a wavy red line.

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