We posted a dollar rise *alert* at the beginning of November based on some contrarian thinking in the market at the time.
And the contrarians did not do a bad job of calling the bottom in the dollar rout:
A few months on and the financial world is purportedly short the euro to the tune of $8bn. Unsurprisingly the contrarians are once again beginning to show.
Among them is Citi’s FX Technicals team, who warned clients on Tuesday that a long term uptrend might be about to resume in EUR/USD:
For several weeks as EUR/USD has fallen, we have tried to make an effort to continually express the view that the move down is part of a ‘correction’ in the long term uptrend rather than a trend itself. One chart we have remained focused on is our favourite EUR/USD overlay which regular readers should know well by now. There are now additional technical developments both on our favourite overlay and other charts which suggest that a low may have been posted on EURUSD and it may be time for the long term uptrend to resume…
And here’s their chart:
Supporting the technical view, meanwhile, is the team’s belief that Greece is essentially “to small to fail”:
Overall we still maintain that the next significant medium to long term directional move on EUR/USD will be up and that the pair will eventually post new highs. As was the case in the early 1990’s, is the fundamental picture going to converge with the leading technical indications? We understand the market is still very focused on fiscal developments / positions within the eurozone. We will again re-print the conclusions from our bulletin titled ‘Is Greece too small to fail?’ (dated 29 January 2010) below. The answer to that question for us is still ‘yes’
And when viewed versus the dollar:
Taking all this into account where you are “loaded with Dollars” (Sovereign funds) and see one zone (Europe) taking the pain and causing a tight fiscal and monetary regime and retaining the “real value” of the currency in classics Bundesbank fashion.
On the other hand the 2nd zone (U.S.A) is pursuing a loose monetary and loose fiscal policy in an attempt to reflate and inflate. In this environment which Bond market and currency market (from a big picture perspective) is likely to be a better store of value.
To us this remains a no brainer… The Bund and the EURO.
The answer from a market, economic and political perspective is yes.
The straitjacket of the Euro will enforce harsh medicine and they will be supported in that effort if necessary when they show that they are seriously and structurally addressing the issues.
At that point the EURO will be seen for what it has become. A serious alternative reserve currency and finally a worthy successor to the Deutshemark and its associated discipline in monetary and economic affairs. Sadly it will have taken a crisis (as it often does) for it to make this final step.
In other words there’s a strong chance the Greek sovereign crisis could end up being the euro’s finest hour.
On the flip side, however, Citi asks if the dollar could be about to “fail” (against resistance).
Related links:
When G7 bond yields tell you nothing – FT Alphaville
Chart du jour – sovereign risk - FT Alphaville