Euro Targets Strength As Euro Zone Calm, S&P 500 Surges, VIX Tumbles

By David Rodriguez, Quantitative Strategist

Fundamental Forecastfor Euro: Bullish

The Euro looked to trade considerably loweragainst the US Dollar (ticker: USDOLLAR ) as the Greenback set the stage for a major breakout , but a late-week reversal leaves the Euro/USDollar poised for further gains in the week ahead. Limited economicevent risk across the G10 suggests volatility may be limited, butrecent experience emphasizes that major price moves can and dohappen at a moment’s notice.

The biggest Euro story of the past week wasthat the European Central Bank struck a fairly cautious view on inflation , and 1-year forecasts for ECB interest ratesare now at their highest since August, 2011. The previousweek’s breakthrough in the Greek fiscal crisis shifted market focus away from the minutiae ofgovernment negotiations, and clarity brought eyes back to thetraditional short-term forex market movers in broader financialflows. The US S&P 500 finished the week above thepsychologically significant 1,400 mark for its highest close sinceMay, 2008. A strong overall shift towards risky asset classes hurtthe safe-haven US Dollar and supports our forecasts for furtherEURUSD gains.

European economic data will be limited to seldom market-moving Purchasing Managers Index data, and we’ll instead look to the S&P and other key asset classes to drive Euro/US Dollar moves. The S&P 500 Volatility Index (VIX), which effectively measures the cost of speculating on and hedging against major equity market moves, now trades at its lowest levels since the beginnings of the financial crisis in 2007. The S&P itself is up 11.7% year to date—an incredible 73% annualized rate of return—while the VIX is at a paltry 14.5%. This is clearly an oversimplification, but an annualized return above the VIX implies that risk-free profits can be made. Is this normal or reasonable? Absolutely not. We believe that markets are growing incredibly complacent and run the risk of a dramatic correction through the foreseeable future. But one thing is what markets could do and timing any such pullback is most often incredibly difficult.

As mostly trend traders, we see little reason to call for a significant financial market turnaround if investors seem all too willing to chase year-to-date gains. Analysts cite evidence that the US economy is in the midst of robust recovery as a primary driver of speculative interest in high-yielding assets. The recent calm in Euro Zone tensions likewise removes tail risks to global economic recovery, and our DailyFX 1-Month Volatility Index (our FX equivalent to the S&P 500 VIX) trades at levels not seen since 2007. In such an environment we see little scope for a major US Dollar reversal, and indeed the Euro could be a major beneficiary of near-term Dollar weakness.

Recent CFTC Commitment of Traders data showsthat large speculative futures traders continued to scale backEURUSD short positions through the seven days ending March 13.Further short covering could push the Euro to fresh highs, and wesee technical evidence that the EURUSD could break above $1.3290 as long as it remains above $1.3045. Marketfundamentals tell us that few investors seek the relative safety ofthe US Dollar. In fact, safe-haven US Treasury bonds saw theirworst week-long sell-off in four months and yields tradedsignificantly higher.

Most signs point to US Dollar losses and Euro gains, but our trading bias is clearly not without risk and we will watch for any signs of a turnaround in complacent financial market sentiment. – DR
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/forecast/weekly/eur/2012/03/16/Euro_Targets_Strength_as_Euro_Zone_Calm.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

More from Currencies

Fintech Stocks Want to Put Money in Your Pocket: Chart

Fintech Stocks Want to Put Money in Your Pocket: Chart

What Is Comparative Advantage?

What Is Comparative Advantage?

Bitcoin Today: Say So Long to $7,000 as Prices Tumble

Bitcoin Today: Say So Long to $7,000 as Prices Tumble

What Is Ripple and How Does it Work?

What Is Ripple and How Does it Work?

Bitcoin Today: The Bid for $7,000 Continues

Bitcoin Today: The Bid for $7,000 Continues