Medium Term Fundamental Trade: A Case for the Euro!

I want to show you how to crawl into the mind of a fundamental trade. As an example, I’d like to show you a recent example of how I go about formulating a longer term fundamental view of the euro (EUR/USD). So let’s take a look below…

For the first time in a long time, I see the start of a fundamental shift for the Euro Zone. It’s not just one thing but actually there are six pieces to this pie as I see it. Let’s take a look at them for a moment.

The talk among the European central bankers is starting to change. For instance, over this past weekend, the ECB’s Wellink is talking about a “floor for the benchmark interest rate”. Others have stated that it may not be a wise move to take interest rates lower.

So for the first time in a while we’re seeing the European central bank members talking about halting the interest rate decreases. That’s a first step in halting the fall of the euro.

Also over this past weekend, the Group of Seven (G-7) nations got together and have released a statement that said, “Economic activity should begin to recover later this year”. Then they went on to say that, “Recent data suggests that the pace of decline in our economies has slowed and some signs of stabilization are emerging”.

This will give investors a sigh of relief and it will encourage them to “come back out of hiding” from within the dollar and yen and to inch back into beaten down currencies that have a huge chance for appreciation. The first place money usually runs to is the euro (nicknamed the anti-dollar). So if money leaves the dollar (and I think it is), then the first stop is the euro.

Now, the next changes that I’ve begun to notice are the recent changes in the sentiment indicators for the Euro Zone (particularly Germany).

For instance, the German ZEW economic sentiment indicator came in at -3.5 two months ago but was expected to come in at +1.8. However, it blew out those expectations by coming in at +13.

Another sentiment indicator complimented the ZEW. It’s called the German Ifo report and it is a survey that has to do with the business climate. Two months ago, it came in at 82.2. This past month, it was expected to inch fractionally higher to 82.4. Yet it blew by those expectations and came in at 83.7.

So with the Euro Zone being in such disarray and the sentiment numbers still coming in more bullish than expected, it becomes a huge vote of confidence going forward for the euro.

Then we come to the final pieces of the puzzle which are the recent improvements in both the manufacturing and services numbers for Germany. These improvements, along with the stabilization of commodities help to underpin the euro and stem its fall too.

What does the stabilization of commodities have to do with the euro? The EUR/USD pair is predominately driven by “dollar flows”. So as the dollar falls, the EUR/USD rises and vice versa. As commodities rise, the dollar tends to become weighed down. As commodities fall, it’s like the ankle weights are being taken off of it and it propels higher. So if commodities have completed their fall and they’ve based sideways, it’s only a matter of time before they turn upward and head higher once again. As that happens, the dollar will plummet and the euro will be one of the biggest beneficiaries of the slide off in the dollar.

Therefore, for these six reasons mentioned above, I believe that the euro has put in a floor around the 1.25 level to the dollar and that we will see it start to head higher in the months ahead.

For many, this will be a “hard pill to swallow”. After all, I hardly know of anyone out there talking about the euro going higher in the months ahead. Almost everyone is betting on the rise of the dollar in the months ahead because of how well it has done in the past year. However, the dynamics that blessed the dollar with a good year last year are starting to change….and my readers are tipped off to it ahead of the masses.