Still Time to Buy the EUR?
On October 8 of last year,
we presented the chart shown below with the caption: "Possibly a buying opportunity".
As we now know, the EUR moved up to 1.2927 in a dramatic surge until the month of February 2004, when a correction or consolidation set in.
Now that we have gone through a correction that has lasted for more than two months, causing the EUR to fall by 10% against the USD, it is timely to wonder once again: "Is this another buying
opportunity?"
So let's examine what the future course of the EUR against the USD may likely be:
The long-term picture
Examining the long-term picture, two aspects become evident in our opinion: firstly, the up-trend which started in 2001 remains unbroken, and, secondly, we are in the midst of a major resistance zone which goes back to the period from 1988 to 1995.
While we had a first test of the 1.30 area in February, the key question remains whether the next test of this area will lead to a new recovery high which would confirm that the EUR remains in an unbroken up-trend.
The other question we are presented with is the one whether the correction down from 1.30 to 1.1750 constitutes a correction or a trend reversal. In our opinion, another test of the resistance line at 1.30 is likely; the market will have to tell us if the up-trend is confirmed, or if this test will have failed. Nobody can predict the outcome of this test with certainty.
The medium-term picture
For the time being, the EUR vs. USD remains in an up-trend. This is a fact, and as long as this remains true, we maintain and reaffirm that we have a buying opportunity, so this it not to be construed as the last chance to sell.
The short-term picture
The short-term picture offers another perspective on the long- and medium-term view. We perceive the down-trend which has lasted for just over two months, supporting the adage, "a trend is a trend till it bends".
Nevertheless, a trend is established through higher lows and higher highs, and in order to confirm the down-trend, we would need the EUR to close beneath the low of 1.1756 of April 26. The chart below would in fact imply that the down-trend is being broken to the up-side and in order to endorse the break-out, we would need a close above the mark of 1.2079.
Is the USD still fundamentally overvalued?
In October 2000, the EUR fell to 0.8225 against the USD and has since risen to a high of 1.2927.
This is an astonishing increase in value of the EUR against the USD of 57%.
Markets tend to go from oversold to overbought and purchase power parity calculations have little influence on currency movements in the short-term.
But as long as basic economic imbalances persist, like the huge trade and budget deficits which the USA reports, the major down-trend of the USD is unlikely to change.
Furthermore, the more the dollar falls, the more investors get scared and gloomy for which reason we see little motive for a dramatic long-term trend-change.
The following recommendations were valid at the time of writing, viz. at
and not necessarily when you happen to read them.
The performance of an international portfolio depends to a large extend on the currency risk it contains.
A European who buys gold stocks, or precious metals, which are denominated in USD, may lose a big portion of his gains due to the weakening US-dollar.
We apply investment strategies which neutralize the currency risk.
For information or specific questions you may have, contact investment@pzim.com .
Yours sincerely,
Peter Zihlmann
www.pzim.com
investment@pzim.com
forex@pzim.com
May 7, 2004
Disclosure: The author has not been paid to write this article, nor has he
received any other inducement to do so. The author is a shareholder in the
company and will benefit from any increase in the company's share price.
Disclaimer: The author's objective in writing this article is to invoke an
interest on the part of potential investors in this stock to the point where
they are encouraged to conduct their own further diligent research. Neither
the information, nor the opinions expressed should be construed as a
solicitation to buy or sell this stock. Investors are recommended to obtain
the advice of a qualified investment advisor before entering into any transactions
in the stock.
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