Sunday, June 6, 2010

Extreme volatile trading week ahead, sign of a EURO collapse?

When I hear the word volatility I think of making money. Plain and simple. Volatility can be good, but too much volatility can be dangerous. Getting in the danger zone doesn't mean there isn't any money to be made, but we have to play our cards right if we want to. We are looking at the Euro currency, it's fundamental and technical outlook. It seems like this pair is out of control and showing no sign of direction, or does it? Let's take a look first with a clean chart;

[caption id="attachment_621" align="aligncenter" width="591" caption="click chart for larger image"][/caption]

This chart was picked right of my trading platform at this time of writing. Numerous analysts have claimed the pair is heading towards 1.17 and for once I think I have to agree with the majority. There are some vital upcoming events this week that will set the tone for direction of this pair and I believe that tone will be downward pressure even further.
Here's my reason why. Fundamentally I have always believed that the Euro currency is too overvalued against the USD, since it was trading above 1.10 level (my extremes even) the Purchasing Power Parities (PPI, a measurement how currencies are fairly valued against each other), but that's not the reason why I agree. I agree because of the clear economic diversity in the Euro zone, something that's somewhat embarrassing if you ask me. Where's the union in the European Union at this point? Countries blaming each other for poor economic data or turmoil, and the gloomy future of the common currency.
The problem is co-operation. And I would know, in essence I am European myself, being only 7 years in the United States. There are so and all too many different cultures and economic differences within the EU, it's almost, if not impossible to satisfy every member of it. Remember, the whole idea behind the Euro was to have a stronger economic block against the United States and Asia / Australia. Instead of having all these individual currencies trading within Europe and the world, members of the European Union thought it was a bright idea to create a common currency, the Euro. At first, it all seemed well until they adopted countries withing the Union that were not so economically sound. The result now? Fundamentally strong nations like Germany have to bail out countries like Greece and maybe many more to come. If continuing and no agreement is reached soon, a disaster scenario. Strong economic countries are not going to put up with this. When the Euro collapses, what then? Going back to what it was, German Marks, French Franks, Dutch Guilders? Is this doom scenario for real? It could be. I hope not, that's for sure. Because when that happens we are likely going into a second recession that can be more fierce then the last one. The US, Canada and Asia, does a lot of trading with Europe. A collapse of the currency would be disastrous for world economic growth.
As of right now, with this in mind, what does direction in this pair look like?

On the chart above with Bollinger Bands enabled you can see the pair has slammed through that level even, indicating a strong downwards trend. I believe the trend is to continue. The Dow Jones Industrial Average and the EUR/USD are somewhat correlated to each other (in recent trends) meaning when the Dow's down the pair seemed to end lower as well. In tomorrow's session, I see the Dow close higher, putting it above 10k again, but the bullish pressure won't be much, a few gains like 0.1% to 0.4%, to make up for the losses of last week, affecting the EUR/USD by targeting 1.17 and below. My trade recommendation is a sell position between 1.1950 to 1.1900 targeting 1.1850. Or if you're adventurous, 1.1800.


All opinions expressed, trade recommendations/advice on this website are solely of John van der Munnik and are not affiliated with any investment firm or any other organization. You should not make an investment only based using this website VDM Trading for your trading needs without seeking help from your own financial advisor.