Saturday, July 14, 2007

Euro struggling to decide whether to break out of its trading range

The euro may or may not be on the verge of breaking out of its $1.33 to $1.38 trading range. It will take another few weeks to tell. The euro did close modestly above the $1.38 upper bound of the range on Friday, but not by enough to call it a convincing breakout. Euro futures (September) closed on Friday at $1.3817, 1.64 cents above the $1.3653 level of a week ago. There are plenty of traders and speculators who would like to see the euro break $1.40, but whether there is really a net demand for the euro at these levels remains to be seen. I would give the euro bulls and dollar bears a couple of more weeks to see if the euro really wants to stay up at or above $1.37 and $1.38 before concluding that the euro is likely to weaken for the rest of the year.

Euro futures out at December 2008 were only at 1.3928 on Friday, so there isn't exactly a lot of enthusiasm for betting on a $1.40 euro, so far.

For now, the euro remains in relatively uncharted territory. It is now mostly a question of the level of speculative money flows. With some people still misguidedly believing that Fed rate cuts are still likely in the Fall, the flows could be net-euro for some time to come. On the other hand, just a few good economic reports, persistently high energy prices, strong talk from the Fed about fighting inflation, a decent Q2 GDP report in July, and a strong hint of a rate hike in August or the Fall, could quickly sap the staying power of all but the most diehard of over-extended speculators.

I wouldn't be surprised if speculators managed to keep the euro up in the $1.33 to $1.38 range as long as there is any superficially bad news to focus on, but it is just as likely that they will trade it back down under $1.30 as soon as they begin to deeply grasp the truth that the Fed is very unlikely to cut rates over the coming year.

In short, the dollar is not "plunging." [And I will continue to repeat this line until The New York Times admits that they were wrong for claiming that the dollar is "plunging."]

-- Jack Krupansky

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