THE DOT - if this turns orange or red be alert

Tuesday, August 26, 2008

Euro special - the dollar has turned tides?

On the left hand, you see the Euro's steep decline, which is one of the steepest in the last 10 years. It came very much in handy as we expected dollar strength and oil weakness for Q3. The EU goes into recession as are all G7 countries (the early stage of global depression). As you can see by the chart, so far the Euro returns to the average pace of the last 2 years and will find a bottom in the 1.44/5 area within the next 2-3 weeks. We will get a corrective wave B up to 1.50-3 and another wave C down to 1.36/8, which is the 10 year trend support and the 50% retracement level of the upleg from 1.16. Overall, the uptrend is and will be still unbroken at all these levels and we just see a severe correction so far. Before the big trend turns, I expect another blow up of the Euro when the financial disaster gets into a higher gear in 2009 with big financial institutions failing and the FED in a crisis. We should then go above 1.60 -- probably 1.65/7 before the big trend change will take place.

It will be a big drag on US earnings going forward, since the majority of the companies with positive surprises delivered those mostly due to currency gains in their international operations. Negative for M&A business, since USA is not cheap anymore, hence another negative for investment banks loosing more profit potential.

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