This week began on a positive note for financial markets after the weekend announcement of a bailout package for Spanish banks. The news was well received by markets - for a few hours anyway!
At the moment, Europe is the ‘flavour of the month’, meaning that when good or bad news breaks relating to European debt, economies or currency, the markets react strongly. This has not always been the case and will not always be the case.
Recently the news has been all about the challenges being faced by Europe, which has taken the focus off the US, whose own sizeable debt is approaching 16 trillion dollars. To give you an idea of how big that number really is, try typing it into your calculator or writing it down: $16,000,000,000,000. In the middle of last year, the US had to increase its own credit limit to borrow enough money just to pay the bills! But when was the last time you heard about that in the news? We have known about the economic challenges facing both Europe and the US for years but for some reason, we only hear about one of them at a time – whichever is the ‘flavour of the month’.
To illustrate my point, take a look at the Euro against the US Dollar (EC-Spotv in ProfitSource software), illustrated in Chart 1 below:
click to enlarge
This chart represents the value of the Euro compared with the US Dollar, so a falling market indicates a stronger US Dollar and a rising market indicates a stronger Euro.
Take a look at the period from July to October, 2008. You would think the Euro was about to disappear, people were selling it so savagely. Then, for the next year, the Euro rose sharply into the November, 2009 top. Then people decided they didn’t want Euros anymore and the currency plummeted into June, 2010, when investors changed their minds again and it rallied into May, 2011 before investors changed their minds and sold off the Euro yet again!
Having lived and traded through all of this, I have been amazed at the seemingly narrow focus of the media during these times. It’s almost as though they only have the capacity to write/talk about one problem at a time, their particular ‘flavour of the month’.
The lesson for traders is to follow your swing charts and ignore the media hype. The flavour of this month is not guaranteed to be the flavour of next month.
The severe moves on the Euro over the last four years all lasted between six and 12 months. The Euro has now been running down for a little more than one year from its May, 2011 high and I’m sure it won’t be long before the US comes back into focus and we ‘forget’ about Europe’s troubles for a while.
And if US debt comes back into the limelight, I can think of a smaller currency belonging to a country with very little debt that might just benefit from such a switch in focus. More on that next week!