Not so long ago I opened an
independent Italian newspaper and counted just how many times the euro crisis
was mentioned in the articles. Then I counted how many times the names of Monti
and Berlusconi were mentioned. You might wonder what the trick was. That’s
correct, there’s no such thing as an independent Italian newspaper.
The euro crisis is anyhow an exciting
topic to follow insofar as many of us keep some portion of our savings denominated
in euros. Well, I do. Recent months have
brought a weakening of the euro against the dollar and little insight into the
future of the exchange rates. So I am asking, what do I do with my euros in
order to hedge against their price fluctuations in the short- and medium-term?
As we know, there’s no other
market as competitive as the foreign exchange market. That means the curve expresses the common opinion of all players as to the price of the
underlying good/asset (in our case the euro) to the best of their knowledge. One
important question is whether that price is fair.
It’s hard to believe that for
the price to be fair, it has to change so rapidly and decisively each second.
The state of the world is volatile,
but not as volatile as the curve displays. It seems more plausible to have a
slow-moving equilibrium over the long run (the ‘fair’ price), while the
medium-term movements hover around it in shape of steeper trends. Technical
analysis can be called the art of predicting the ‘unfair’ price movements, and the
fair price is more easily predictable using the common understanding of the
worth of the currency.
Long-term financial planning is
warranted relying on the fair price opinion, but unless you and I are D. Trump and
G. Soros, we probably won’t make much money on it. The more exciting scenario for
our savings is to monitor the current trends, hopping on and off whenever the
trends change.
Dr. Skryhan, my co-national
foreign exchange market analyst, presented his technical analysis of the
current situation on the ForEx (the graph follows).
The upper curve is the price of
one euro in terms of dollars over the past two years. The lower graph features
the long-term trend (the turquoise histogram) and the local trend (the red
histogram). Until last year’s peak of 1.4938, the euro had been ascending in
value against the dollar. Ever since, however, the long-term trend – and seemingly
the fair price – has been descending.
Technically speaking, shorting
the euros a year ago was a good long-term decision. Despite the recent upward
price movements, the general trend is descending. The explanation lies in
largely unsolved problems within the European monetary union and the resulting
uncertainty about the underlying worth of its currency.
This is not to say we can’t be
bullish on the euro. Long positions are plausible for short- and medium-term.
The price has overcome the upper limit of the correction range stated at 1.2520
(the resistance line) and continues its ascent to its medium-term target of 1.3383.
Before the price reaches that point, the general opinion is to long the euro. The
local resistance point is 1.2646, but we can already see the outlined trend
towards the medium-term target (see the graph below). That might seem counterintuitive, given the amount of discouraging news from
Greece, Spain and several other countries of the Eurozone. But the nature of
the ‘unfair’ price tendencies is simply – unfair.
So what will I do with my
euros? Hop on the ‘unfair’ price for about a month but keep watching. Time deposits
denominated in euros is a bad idea today in case we look to keep our money safe
and growing. The long-term roll-back of the euro might cancel the effect of the
low interest rates of foreign currency deposits. Dollar-denominated deposits
sound better if we are interested in long-term (around one year) and a more
stable growth (safety) of our wealth. Short-term currency deposits are risky to
marry with. I will more likely short the dollar against the euro today, but
will return to it in the near future, hoping the spreads remain tight as they
seem to be today.
Baltinsky Financial keeps an
eye on the exchange rates and the major shifts in the industries and will continue doing so in the future.
