The Euro: Long-Term Forecast (Part I)

Market Leader informed

Part I

A brief background

The Euro (symbol: EUR) is the official currency for 16 Eurozone countries (Austria, Belgium, Germany, Greece, Ireland, Spain, Italy, Cyprus, Luxemburg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, Finland, France). This currency is also by other 9 states, including 7 in Europe. So, the Euro is the single currency for over 320 million Europeans. In December 2006 there was 610 bn. Euros of cash in circulation, the highest figure among currencies in terms of the largest total value of cash in circulation worldwide, even ahead of the US dollar.

Important events for the single European country.

In 1971 US President Richard Nixon ‘suspended’ dollar-for-gold exchange and carried out a few rounds of devaluation: the gold ounce rose to $38 in 1971 and to $42.22 in 1973. The dollar-for-gold exchange was not resumed and, in 1976, the Jamaican Currency System was created to officially cancel the dollar-to-gold peg and maintain the dollar, nevertheless, as the global reserve currency with a floating exchange ratio.

As of 30 September 2006, there was $971,922,146,480 worth of banknotes and coins including $790,556,011,806 in open circulation (i.e. $150 per each person on the planet). Banknotes worth $100, $20 and $10 were most widespread.

ECU (₠) – the currency unit used in the European currency system of the EEC and EU in1979-1998. ECU derives from European Currency Unitand the name of French coins, écu. The symbol, ₠, involves a styled representation of the EU acronym from French Communauté européenne. ECU was exchanged for the Euro at a 1:1 ratio on 1 January 1999.

The ECU rate to other nations’ currencies was based on the fact that ECU served as a generalized representative of a basket of currencies of nations that were members of the then European currency system. ECU was introduced for cashless settlements alone. Nevertheless, ECU was printed in the form of coins, bonds and government borrowings for the private sector in some countries.

ECU was in many ways characterized as a real currency:

·                           it served as a full measurement standard.

·                           it was a calculation unit for anything related to ECS and for economic and financial activities and accounting in the Community.

·                           it was a reserve value asset.

·                           its issue was secured by currency reserves and was subject to interest payment.

·                           it was used for settlements within transactions involving central banks that were ECS members.

for cashless settlements, the Euro was introduced on 1 January 1999.

for cash settlements, the Euro was introduced on 1 January 2002.

Sweden and Denmark held referendums, and most people were against adoption of the Euro. Great Britainalso decidednot to give up its national currency.Latviaand Lithuania planned to join the Euro in 2009 but this transition had to be postponed for at least two years because of the economic crisis. Now the target dates are put off for another few years (possibly, till 2014) because of the grave economic condition of the republics who had difficulty fighting off the global economic recession of 2008-2009. Unlike Latvia and Lithuania, Estonia managed to meet all Maastricht criteria required for transition to the Euro by 2011 and, on 12 May 2010, the European Commission officially recommended that this country be included in the Eurozone from 1 January 2011. Problems of economic and financial nature forced other European countries to review their dates for accession to the Eurozone. For example, the Czech Republic intends to become part of the Eurozone latest of all – after 2015 or possibly even in 2019.

To start with, dear colleagues, let’s have a look what this historical research is for. As a summary, the following time periods can be outlined:

- 1971-1976;

- 1979-1998;

- 1999-2010.

I find this crucial for such reasons:

When infrequently looking through current analysis of the EURO rate, I invariably find support for my subjective opinion that advanced analysts restrict their conclusions to standard fear-uninspiring incantations.

1. EURO is growing.

2. EURO is falling.

3. “Grab your bas - the station's leaving". Between the lines: the Eurozone and the single European currency are in for inevitable collapse. In this context, they refer to more or less weak spots of the EAU, crisis etc.

4. “As good as it gets...” Everything’s fine assuring common Europeans of inevitably fine future, there will be stability, prosperity and diamond-cast sky after the crisis is over.

Let’s not ‘spread cooked semolina over the clean table’, as one of the authors popular in the 1930s put it. In this case I’ll be using fundamental analysis. What one needs is to have reliable information while data published by media arouse certain doubts on my part, so to speak. I’ve already written about it:

Quote Details and timing of distortion of economic data are shown in the new book by Kevin Phillips, a political commentator and former advisor of the Republican Party who started arduously unveiling of those ‘extremities’ that used to be put into practice with his direct involvement. The book is entitled ‘Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism’. ‘s Phillips summarizes some of his major conclusions in the article published in the latest issue of Harper’s Magazine.

I’m not sure the state of affairs is any different in the EUROZONE countries.

Quote This is the kind of ‘reliable data’ we are provided with by news agencies, including Dow Jones which is part of the consortium of market-maker banks (see above). Should we be surprised that instead of following the news the currency behaves the other way around. The matter is that having a powerful analytical machine and relying on fundamental laws of economy market-maker banks possess real information about the economic position of both individual countries and entire countries and, based on this information alone, make decisions to buy or sell a certain currency. Should we be preoccupied with study of fundamental analysis, dear traders, if such an opponent cannot be beaten in his field? It’s as if you tried to assault with a sword not one tank but an armored division.

If I got the guts to start citing my lovely self, this can be treated as lack of modesty. A agree. In this case, we’ll bring in heavy artillery – classical authors.

Quote “…that reasons which can have any effect on market value… (which reasons can be very diverse: economic, political, psychological – any) will surely be reflected in the price of these goods…” “… anything that affects the market price to any degree will surely affect this very price. Consequently, we only need to follow and study price dynamics as carefully as possible…” “…Analyzing price charts and a host of additional indicators, a technical analyst makes sure that the market itself shows him the most probable direction of its development. We don’t have to try and outdo or outwit the market…” “…Technical analyst knows that the market moves up or down for some reason. But knowing the exact reason is hardly necessary for his forecasts…” John J. Murphy. 1996, page 12.

I suggest we use technical analysis and analyze EURUSD global trend. Please note that we are looking at 1948 - 2010. So, the 1948 to 1979data can be regarded as synthetic and, most likely, based on the exchange rate of the German mark which was the strongest currency of the European countries at the time when ECU and EURO were introduced. Our future publications (subjects on individual currency pairs) will use the same periods for analysis. Charts with global trends have to be used because, having a limited price history in our trading terminals, we, dear colleagues, kind of ‘can’t see the forest for the trees’ and, in my opinion, can’t have a full picture of what is going on in the market. Charts are based on confinex.ru data.

 

When looking at the figure ‘without wrath and prejudice’, in my opinion, it demonstrates no visible correlation for introduction of ECU and, later, the EURO. Rather, it reflects the international trend in economy with characteristic rises and falls (crises). Well, cancellation of the gold standard in 1971 can be treated as a factor for the beginning of a stronger upward move. In this case I specially drew no objects in this figure: it’s enough for us to see a rising Euro channel against the US dollar. Let’s simulate further ‘behavior’ of EURUSD.

 

Option 1. Corrective triangle.

When the 60-year trend is treated as the Corrective Triangle pattern, EURO’s fall should continue in this option.Support levels will be broken one by one:

- 1.1876, local minimum of 2010;

- 0.8225, historical high of 2001 and support of the rising channel. Remember:the EURO was introduced as cash in circulation on 1 January 2002.

Further this scenario includes a support at the (C) wave basis at about 0.6000 - 0.4000, and, after this level is broken, the basis for the start of the global trend at 0.2000 - 0.1000. From the TA point of view, this is quite possible.However, in the today’s context of market conditions in the US and EUROZONE I believe such a development of events unlikely.

 

Option 2. Diagonal triangle.

If this concerns the closing diagonal triangle as a pattern that can terminate any wave model regardless of whether this is a correction or impulse, events may take a turn like in Option 1.

Quote When the 60-year trend is treated as the Corrective Triangle pattern, EURO’s fall should continue in this option.Support levels will be broken one by one: - 1.1876, local minimum of 2010; - 0.8225, historical high of 2001 and support of the rising channel. Remember:the EURO was introduced as cash in circulation on 1 January 2002. Further this scenario includes a support at the (C) wave basis at about 0.6000 - 0.4000, and, after this level is broken, the basis for the start of the global trend at 0.2000 - 0.1000. From the TA point of view, this is quite possible.However, in the today’s context of market conditions in the US and EUROZONE I believe such a development of events unlikely.

Let’s assume we’re at the beginning of a move.This pattern will then be viewed as the opening diagonal triangle.In this case, regardless of its depth, EURO’s fall is only a correction so support levels remain identical:

- 1.1876, local minimum of2010;

- 0.8225, historical high of 2001 and support of the rising channel.Remember:the EURO was introduced as cash in circulation on 1 January 2002.

Critical levels for this TA option are the 88.2% correction to the entire move of 0.1000 - 1.6037 and, of course, the global low of the 60-year trend.

Option 3. Wave (C) or Wave (1) in (III).

This option again involves the diagonal triangle pattern.It is different from Option 2 in that this model can be continued as Wave (5). The critical level for this option is a 2010 local low at1.1876. Please note that this option can be cancelled only by a sudden break and strong move of EURUSD below this level. I don’t rule out an option when flat corrections of various complexity are formed around levels at 1.1876 and 1.1639 (the 2005 low). So far, the currency has covered over 600 pips and is in the area of 1.2400.

Option 4. Wave (B) or (II) “running flat”. Wave (C) or Wave (1) in (III).

Difference from Option 3. Wave (B) or (II) was formed as the wave pattern called “running flat”. That’s why the diagonal triangle can be continued as Wave (3). Afterwards it’s similar to Option 3.

Quote The critical level for this option is a 2010 local low at1.1876. Please note that this option can be cancelled only by a sudden break and strong move of EURUSD below this level. I don’t rule out an option when flat corrections of various complexity are formed around levels at 1.1876 and 1.1639 (the 2005 low). So far, the currency has covered over 600 pips and is in the area of 1.2400.

Option 5. Double zigzag (double three).

Wave (c) in (Y).

In this case the starting point of Wave (Y) is the 2001 historical high at 0.8225. So, Wave (c) can be formed as the completion pattern of Wave (Y).

Wave (a) in (Y).

When this version of movement is realized, Wave (X) is formed as a pattern of the “running flat”.Here, Wave (a) as the initial phase of Wave (Y) might have started forming from the 2010 low at 1.1876.

Then it’s similar to Options 3-4.

Quote The critical level for this option is a 2010 local low at1.1876. Please note that this option can be cancelled only by a sudden break and strong move of EURUSD below this level. I don’t rule out an option when flat corrections of various complexity are formed around levels at 1.1876 and 1.1639 (the 2005 low). So far, the currency has covered over 600 pips and is in the area of 1.2400.

What can I say, dear colleagues? Yes, indeed, I am tired of all these options, and you must be, as well. I suggest that we move from the theoretical analysis to simple and clearer things. I use the method of reference points in the VTMT Trading System.

Quote Why it was necessary to make my own TA 1. Classical Wave Analysis is built in a way that any forecast has a nature of probability and the wave structure of movement becomes fully clear only after the cycle is completed. This concerns both impulse and corrective models. Beginners find this especially difficult. 2. Let’s put our heads together and think what is a simpler pattern – a five or a three. I believe it is the three. Moreover, any five-wave movement can be represented as two threes. If you remember, Bill Williams says that professionals close their positions around the peak of Wave (3), and any thesis on WA writes that waves (c) are similar to impulse waves (3) in terms of strength and profit potential. So, what’s the difference what the third stage of the movement will be later called by analysts? I have also faced the following duality in the Faculty: (1) or (a) which often confuses that’s why VTMT treats highs and lows of a movement as reference points (Kt-1)-(Kt-2)-(Kt-3).

You can read further details of this method here

Good luck and profitable trading! Yours, ATEI.

 

 To be continued...