Will the possible euro recovery manifest itself in the usual places.
Yesterday I posted a piece from the BBC adding further weight to general call that the eurozone may start backing away from the austerity path. I noted that should such measures gather pace then that could solicit a positive effect on the euro.
Well after sleeping on those thoughts I have come to the conclusion that my train of thinking was maybe too broad, especially when trying to apply them to trading.
One of the hardest aspects of trading is trading the long term picture. We all live day by day and it’s not easy, in the here and now, to be able to measure and define long term moves in the market. We are lucky that we are in one such move that has been easy to follow and jump on, the Japanese situation. Most long term moves are not always so obvious.
So now to the part where I subtlety contradict myself and point out that the positive effect of a European push to boost growth may not appear in the market where we think.
For the last few years we have not been trading economic fundamentals. We have been trading fear and uncertainty and at times, sheer panic and confusion. How often have we scratched our heads at currency moves that fly in the face of the fundamental picture? Only towards the latter part of last year and the beginning of this did we start to look at the economic picture. QE had been in full flow and positive results were starting filter through into the economy. The US started on its road to recovery.
Meanwhile in Europe the slide was still continuing with anxious moments aplenty.
It was this that changed the market picture. From risk on and risk off we moved to trading currencies based on the economic data.
That brings me to my point (finally). While Europe, attempting to pull itself out of the bramble bush may be good for the euro dollar on paper (euro positive), the effect may be nullified by an improving US economy (dollar positive). If this becomes the case how do we monitor the progress in the market and more importantly equate it into our trading?
I believe the key could lie in EUR/CHF (and the other swiss pairs). We know the swissy has been the safe haven choice for decades, none more so than over the GFC. While the money may not yet be flowing into the euro from people betting on a recovery, the money could well start to really unwind from this long held safe haven. Remember we’ve been down over 6000 pips since pre-crisis levels.
I’m not going to base all this on two days of moves higher in the pair and this is not a recommendation to hoover up EUR/CHF, but merely to try to point out a good gauge for long term trading strategies. I’ll be keeping a close eye on the pair particularly over the ECB meeting next week. If we get a cut and EUR/CHF goes up that will further enforce my view that this will be the pair to play a European recovery on.