Currency traders thought they had it made. But just as they got used to
making their "easy money" one way bets on the euro, the unkind markets
stepped in and "spooked" them.
Let me explain.
Thursday morning, April 3rd, the European Retail Sales numbers
unexpectedly dropped to -0.5 percent. Economists were only expecting a
0.2 percent drop — if that much.
No one was expecting the Eurozone to turn out a negative number. Euro
traders were floored. They ran for cover, dumping the EUR/USD.
Germany, the biggest country in the EU, registered a drop of 1.6
percent. This is when traders started to realize the U.S. economic
slowdown has finally reached them too.
The British pound also dropped right along with the euro when Goldman Sachs lowered its earnings outlook for U.K. banks.
Then the IMF released a statement that announced they had lowered their
economic growth forecast to 1.3 percent from 1.6 percent previously.
Combine all of this information and you have the makings of a rate cut
in the Eurozone (as I've been predicting for some time). The simple
fact that we could see one sent the euro tumbling.
In America, on the same day, the ISM Non-Manufacturing Index (the
Services Sector reading that accounts for 88 percent of the U.S.
economy) numbers came out at 49.6. That's a little stronger than the
49.3 number last month. While this is still in the contraction level
which is below 50, it shows that the contraction was slower than
expected.
On top of this, the futures market in the U.S. now only predicts an 88
percent chance of a quarter point interest rate cut when the Fed meets
for a two-day meeting on April 29 and 30, and only a 12 percent chance
of a half percentage point cut.
The euro could remain in the stratosphere as long as the data were
strong. But now that some dollar data are surprising to the upside and
some European data are starting to surprise to the downside, that
picture is changing.
In fact, even on "weak dollar data" such as last Friday's Non-Farm
Payroll report, the euro couldn't sustain a respectable rally against
the buck even though 80,000 more jobs were lost and the unemployment
rose from 4.8 percent the previous month to 5.1 percent this month.
This means a change is coming for the EUR/USD exchange rate. The euro
may not plummet tomorrow against the buck. We're still in a bit of a
transition phase. However, it's definitely coming.
I believe the euro will sell off broadly against most currencies, not just the dollar (but certainly against the dollar).
Once the fall starts, the euro will finally work its way down to the 1.46-1.50 level in the upcoming months.
Translation: If you've been shorting the euro, you'll be rewarded in the coming months.
Sean Hyman
Currency Director
The Sovereign Society
