In years to come, Forex traders are going to look at the EURUSD chart from mid 2012 and ask you, “How much money did you make from that??” as they point to the Euro’s obvious decline.
But this decline’s not new. Take a look at this daily chart and consider that in April 2008 1 Euro would buy $1.60 of your Earth Dollars, but as I write this you’d get a paltry $1.2415. And this move south is nowhere near over by my reckoning.
We’ve just tested 1.2035 which has no historical significance but was close to the monthly s2 pivot and as good a place as any to cycle back to the 50EMA (red). If this next move down touches 1.1870, we’re testing the lowest price since July 2010. Next stop is the 2006 low and if we break that, all bets are off.
But what’s driving this? Surely if the Euro was in such big trouble we’d have seen the move by now?
Well no. The ECB and heads of the European economies have done a stunning job of burying their heads in the sand, but what’s changed since the crisis began in 2008? Nothing. Not a single issue at the core of the Euro crisis has been addressed, every move made has been to (literally) buy time while they hope things sort themselves out.
But the truth is Western governments and Euro area governments in particular, have a massive, crippling debt problem to deal with. All talk of stimulating growth depends on stimulating lending into industry and the consumer. So their answer to crippling debt is, once again, more debt.
This can’t and won’t go on indefinitely. Something’s got to give sooner rather than later, and if it isn’t Greece then it’ll most likely be Spain. If either of these default on their debts, that opens up a fresh banking crisis because a lot of that debt is owned to retail banks across Europe – trouble is, who’s got any money left to bail them out?
Not the governments. They’d have to borrow from the ECB if they wanted to nationalise their banks, but who’s going to fund the ECB? The Euro governments? The IMF? The Chinese? Aliens?
No, the Euro cannot exist in it’s present form. The banks are going to take a huge hit as it revalues. Governments could well fall because they’re all operating in extreme denial, and when they’re found out there’s going to be hell to pay.
So, as the Euro breaks these next key levels, are you going to play a long bounce, or a break short?
Adam – TheDayTrader