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A little more than 18 months ago Mario Draghi famously spoke that the ECB would do whatever it takes to save the euro. He looks pretty good. Checking the chart out on the right, we can see his speech was the exact low for the EUR/USD, but what is more impressive is that it is also the exact wides for a large number of intra-EU bond spreads and they are still narrowing today as todays interest rate letter, Bravo e Ol, points out. But was this really the best thing for the southern periphery perhaps a lower EUR/USD would have been better than a macho German-euro. The situation bears a strong similarity with the cowboy-dollar of Ronald Reagans time, when the term rust belt came into vogue as the American heartland could no longer compete with Japan and Europe at the very high dollar levels. A strong dollar might have made Washington and New York feel good but it paralyzed certain parts of the country and they still have not recovered their market position of 35 years ago. Jut like 1985, when the Plaza Accord was drafted, something has to be done. We dont see that happening as we are not political prognosticators, but we do know the euro is too high for the health of the Eurozone.
Looking at our cyclical and technical picture, we see the EUR/USD at or very near a very major that means more than two years cyclical high, we think. There is a chance this high could come in the fourth quarter, but a very weak emerging market picture could scuttle any chance for a late year euro peak. If the global markets look relatively healthy, the chance of a strong euro into October is much higher. However, so far this year we have seen the EM struggling badly and this tends to drive us into the Draghi had better do something to save the Eurozone camp.
Our cyclical picture call for some euro strength into the end of February, but there should be a minor high in the next day or two and a bout of weakness into the first few days of March. We are expecting resistance at the 1.3810 to 1.3850 to handle the topside in the next few days, while the expected weakness into March will probably go no further than the 1.3600 to 1.3620 area. Not much excitement here. However, if the emerging currencies get into trouble there is a chance of more volatility and we would fear for the 1.3600 level in the first week of March. More likely, we will see a slow upmove into late March.
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