Dollar Looking Strong Against Euro
The global economy has posted some strong gains in growth since the widespread financial collapses that were seen five years ago. But when we look at various regions, we can see that all of that growth activity has not proceeded forward at the same rate. For example, emerging markets have not seen the same results (on both the corporate and national levels). This means that we have seen stalling stock market rallies when the equities benchmarks in the BRICs countries are compared to more developed markets. Most directly, these trends can be seen in the relative performance of the SPDR S&P 500 Trust ETF (NYSE:SPY) and the iShares MSCI Emerging Markets Indx ETF (EEM).
As is generally the case, the emerging markets shows price activity that is much more volatile and directionless when compared to the steadily building rally that has been posted in ETFs that are tied to the S&P 500. But the differences over the last five years have been much more pronounced, and these trends are likely to continue now that the Federal Reserve has set a clear timetable for when it will end its QE stimulus programs. But mostly, these decisions will have the biggest impact on the US Dollar, which has already started to show some significant moves against the Euro.
Euro Rally Looks Finished
(Chart Source: CornerTrader)
In the chart above, we can see that the EUR/USD has made a pretty violent change in direction after rising to the 1.40 level. When we look at the Euro purely from a chart perspective, there are a few different signals that can be discerned which suggest that the Euro will be headed lower in the coming months. One excellent resource delineating this activity is the ForexAbode weekly EUR/USD technical analysis outlook. For active traders, this good resource when looking to find specific price levels and make short and long term trading positions based on the historical tendencies at support and resistance. There have been some interesting developments in the overall price activity in the Euro, and there are now some relatively clear price targets that could easily be met some time next month.
So if we do believe that the medium term outlook for the US is still positive, we can expect some correlated moves in alternate markets. Higher prices in the PowerShares DB US Dollar Index Bullish ETF (NYSE:UUP) could put some added pressure on the SPDR Gold Trust ETF (NYSE:GLD) and the iShares Silver Trust ETF (NYSE:SLV). Upside activity in the UUP ETF could pose new negatives for both GLD and SLV. These latter ETFs have already been beaten up in recent weeks, following the massive downside moves that were seen last year.
In terms of global currencies, the real areas to watch can be found in the Guggenheim CurrencyShares Euro Trust (FXE) and the CurrencyShares Japanese Yen Trust ETF (FXY), as these are two of the most commonly used alternatives for those looking to trade for or against Dollar assets. Of all these choices, the fundamental outlook for the Euro looks to be weakest, given the staggering unemployment rate and the fact that the European Central Bank is now making moves to start adding more economic stimulus. Since this is not even close to being the case in the US (or even Japan), there is little reason to believe that the Euro or its ETFs will be able to post sustainable rallies in the late parts of this year.
For investors, this means that it makes at least some sense to start trimming back on assets that are tied to the value of the Euro. It is unlikely that we will see any significant changes in the underlying Eurozone fundamentals before the end of 2014, so it doesn’t make much sense to start adding significant exposure in the stock of European companies at this stage in the market cycle.