Back in December when we wrote our post “Is It Finally Time To Sort The Euro” we got a lot of flack for saying that the US Dollar was bottoming out and that the Euro was going to drop.  We received e-mails telling us about all of the problems with the US and why the Dollar is going down forever.  Our basic answer has been that while the US has tons, and by tons we mean trillions upon trillions, of problems the US Dollar is not going the way of toilet paper anytime soon.

While we knew of many of the problems in the EU when we wrote our post we had no idea how bad and how fast they would manifest themselves.  As you can see in the chart below since our post the Euro has broken down, consolidated at the 200-day moving average, and then broke down some more. (Click on cart to enlarge)

EUR/USD Daily Chart

So what do we see going forward?  In our earlier post we showed a chart of the EUR/USD purchasing power parity that showed the Euro as being 35% overvalued relative to the US Dollar.  As you can see in the chart below the Euro has narrowed the valuation gap considerably but is still 22% overvalued to the USD.  We would not be surprised to see the EUR/USD hit the 2008 lows around 1.25 before finding strong support.  (Click on chart to enlarge)

EUR/USD PPP Chart

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-In The Macro Trader newsletter we are short the EUR/USD

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One trade that we currently like is that of shorting the EUR/SEK.  As you can see in the chart below the Euro has been losing ground to the Krona for most of the past year.  It formed a large head and shoulders top and then consolidated in a long bear flag until recently breaking down.  We think that this trade could go down to 9.5 over the next few months. (Click on chart to enlarge)

EUR/SEK Weekly Chart

We have been bearish on the Euro for some time now and lately the news has been going our way as many of the problems that were buried have been coming to the surface.  Not only is Greece in shambles but Spain, Italy, and Portugal are also near disaster as their debt costs continue to go up while their economies languish.  As the PIIGS continue to worsen there is more and more momentum building that could eventually kill the Euro.  We doubt that this happens any time soon but if the PIIGS are unable to correct their course it will happen.

Along with our negative view on the Euro another  thing that we really like about this trade is the extreme overvaluation of the Euro relative to the Swedish Krona.  As you can see in the chart below the Euro is trading at a 42.58% premium to the Swedish Krona.  While it has been outside of the 20% bands for a while now, we think that it is due time for a major correction on the weakness in the Euro and the relative strength of the Krona. (Click on chart to enlarge)

EUR-SEK PPP Chart

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-In The Macro Trader newsletter we are short the EUR/SEK

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