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The Fair Value of The Euro

Filed under: EURO, General, JPY, USD - 24 Apr 2008
As a trader I think that Fair value for the Euro is 1.15/1.20!We been under value at 0.82 on October, 2001, and now over value at 1.60. the balance line is 1.17.
That’s make the euro over value by 25% against the dollar. While the dollar at fair value against most asia ccys.
Asian currencies have been falling vs EUR with market focused on fall in USD past 6-9 months. While USD has fallen vs both G10, emerging market currencies, EUR has absorbed a very large part of USD decline. Since start of turmoil in July 2007, EUR has risen about 14%. Asian currencies have fallen on average about 10% vs EUR; even “strong” Asian performers like SGD, MYR, TWD, CNY have fallen more than 5% vs EUR on average, though fundamental backdrop for these currencies is stronger than that for EUR. Notes a fair few Asian currencies are managed; while officials are willing to tolerate more gains to combat inflation they “are still not allowing for fast and volatile moves.” Also, EUR often considered safe and very liquid proxy to trade USD decline story. If anything, EUR gains vs Asian FX have led to “more pronounced fundamental imbalances between Asia and Europe”; Asian currencies very undervalued vs EUR: By about 25% according to its valuation framework. Asia also has more favourable external position than Euroland with less reliance on trade to U.S. last few years. Inflation is on rise in Asia, triggering need for tighter monetary policy. Has long TWD vs basket of 50% EUR and 50%.Goldman Sachs

Screen Forex

Is Europe

Forecast ActualMarch German Trade Balance EUR 17.0bn 16.7bnApril Swiss Unemployment Rate 2.5% 2.6%
No great surprises from the first European data releases. The more important German industrial production number later has more potential to impact on the Euro and probably more so than the two rate decisions due later in the morning.
Meanwhile the White House economist is looking for a H2 recovery in the economy stating “The data are pretty clear that we are not in recession. I would be very surprised if the NBER, looking back at this period, would date this as a recession.”
He expects Q2 to be pretty flat and that retail sales and manufacturing are the only areas of the economy showing the type of deterioration that NBER would consider recession range. He also observed that job declines are, so far, well below those of the 2001 recession.
Therefore the earlier-than-expected release of some government tax rebates could act as a stimulus to the economy, he offered. However, he did voice concern over the exorbitant rise in oil prices which is putting downward pressure on growth. He estimated that every additional $10 on oil reduced growth by 0.25% annually.
The following economic releases are due today:
MarchGerman Industrial Production (MoM) - 0.5%German Industrial Production (YoY) +5.0%U.S. Wholesale Inventories +0.5%
AprilU.S. Continuing Claims (26th)
MayU.S. Initial Jobless Claims (3rd) 375K
The Bank of England and European Central Bank are due to announce their rate decisions
The market appears to be getting the bit between their teeth in pushing the Dollar higher. The decline from the 1.6018 high is the largest since the November correction which saw the Euro dip by around 650 points. Already now the Euro has declined over 700 points and there seems to be more room for additional losses.
To highlight just how significant the decline in the Euro is, it has been the largest percentage drop ever since the 1.1640 low in November 2005. During that time the Dollar lost 37.6% of its value.
And it does seem to be on course for a move to 1.5154 at least, possibly just below 1.51 which would imply a drop of around 5.7%.
Given the market’s preoccupation for hating the Dollar this is a remarkable turn around but more than that it should be sustainable for at least 6 more months.
You may recall that around February last year the market took exception to a talk by Bernanke in which he accepted lower growth and higher inflation. The Dollar was sold off on the back of this.
The European economy appears to have about an 8-10 month lag to the U.S. economy and right now we are seeing Europe beginning to return lower growth and higher inflation while there are tentative signs of a stalling in the U.S. downturn.
The difference between 8-10 months ago and now is that oil has very nearly doubled in price and inflation is even higher. Consumer sentiment is also much, much weaker and credit comes with tighter rules.
At the moment the decline in Europe has not been excessive but with lower growth and consumer confidence the risk is for any weakness in the economy to be thoroughly tested. It may be through LBO’s unable to meet debt obligations as business dries up or it may be through weaker consumer spending as they allocate more of their budget to energy costs and rising food prices.
However, while a bounce in the Euro is expected after the current decline the next move lower could be stronger…

Forex Trading

Cross traded- GBP/JPY.
Today has been a very exciting day. I started the day with two short entries, stopped out @ 228.82 and 228.87 respectively with 38.5 pips losses. With both 6 lots in total, that was a massive 231 pips loss. I've learnt to move on from such hits. Since those trades, I have made two good successful entries and both came up trumps.
... 228.29/31 it went back to take out my stop. Got back in @ 228.48 same result. Got off lightly though, trading 3 lots at a time. Down by 231 pips from stoplosses. In the medium-term the outlook of this cross still look south on the daily time frame.
As hinted in my earlier post, I was looking to taking upside move @228.65 but couldn't. Opportunity arose @229.04 and came of @229.84. As the morning report reactions wane the cross regained momentum. I went in again at 229.69 with fingers on the stoploss. The sloploss was eventually filled @231.45 seconds after adjustment.
I think I am okay for the day. My wish for you is that your forex trading today should become your best yet.
Have a great day.