Binary bet of the week: Euro parity with the dollar seems to be a matter of when not if
Euro Hits 12 Year Lows
Last week was another poor week for the euro, with the EUR/USD plunging to fresh 12 year lows as European Quantitative Easing started to bite and dollar index rode to new multi year highs.
EUR/USD Daily Chart
The dollar index ended the week on a high, stretching a larger gap away from the 14 day moving average.
Dollar Index daily chart
Is the dollar index too stretched? There are some indications that this is not the case as the following chart implies:
Dollar Index Weekly Chart
The chart above plots the weekly dollar index with the Parabolic SAR (PSAR) indicator alongside the 14 period moving average. In the bottom pane there is a bespoke indicator that measures the size of the gap between the price and its Parabolic compared to previous periods in the past. The green line indicates rises when the price his fallen significantly below its PSAR, indicating ‘oversold’ status. The red line indicates when the price has risen significantly above its PSAR, indicating ‘overbought’ status. The bigger the current gap between price and its PSAR compared to the past, the more likely a reversal is on the cards.
As you can see from the chart above, the current price/ PSAR skew line is red, but is still some way off signalling that current levels are dramatically overbought. The gap was bigger back in September, a period that signalled a short term reversal. Right now though, there is still room for further upside before this US dollar rally reaches ‘extreme’ levels.
Europe Divided
The introduction of QE wasn’t the only catalyst for euro selling this week, as Greek politicians ratcheted up their rhetoric. The Tsipras government is stuck between campaign promises to put an end to EU-imposed austerity and a rapidly worsening financial crisis.
In recent times, the ECB has been allowing the Greek central bank to effectively prop up its financial solutions by issuing T bills (mostly purchased by Greek banks). However, the ECB has recently warned about this activity, keeping their approval of such activities to just a seven day cycle.
On the political front, clear divisions are emerging whereby European Commission president Jean-Claude Juncker seems hell bent on keeping Greece in the Eurozone, no matter what the cost. Meanwhile, the Eurozone nations led principally by Angela Merkel and the Eurogroup are pushing for more of a hard line approach. In fact there are some who are accusing Juncker of fuelling the crisis by backing Greece too strongly. It is argued that this is providing Greece with a powerful backstop in its negotiations. It is Greece threatening to leave the euro, rather than the EU threatening to expel Greece. Yet many hardliners believe that it is only the threat of expulsion that could bring Greece to heel.
With financials reaching crunch point and politicians riven by divisions within divisions, the euro’s future is hardly assured. On the other hand, the dollar index is still charging higher and so far it has not reached overbought status.
All in all, euro parity with the dollar seems to be a matter of when not if.
Comments (0)