The Euro Holds the Key

 | Feb 23, 2012 | 11:07 AM EST  | Comments
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Watch the CurrencyShares Euro Trust (FXE). It may be the key to the market right now.

We all know that gasoline is the gun to our back, but how about something that might be an unseen positive, like a potential breakout of the euro.

Bob Pisani of CNBC made some terrific points today about the hobbled European banks. They are still suffering with horrendous Greek exposure. I was surprised to see how behind the eight ball Agricole was when they reported.

But, at the same time, the euro seems to be poised for an upward move, something NO ONE I know is thinking about. I keep thinking back to a Tweet I saw last week that said that every time the FXE gets to $132, it is a lay-up short.

But the ultimate lay-up shorts were supposed to be Italian and Spanish bonds, and that sure wasn't the case. If we are to believe the reports that many hedge funds are buying up sovereign debt in Europe, even Greek debt for the restructuring, then we know they are buying euros. American banks are moving in aggressively. They are buying euros. Germany is still doing fairly well. That supports a strong euro.

Why is this so important? Because it can act as a counterweight to all of the problems caused by the out-of-control increases in oil in the past three weeks. If we can get the euro stronger, many of the companies that just reported that were worried about the trajectory -- many are using $125, by the way -- will be able to take that monkey off their backs.

The crosscurrents are mighty. Gold is ramping. Retail is strong (go figure). But if we could get the price of oil to cool for a couple of days and the FXE to break out from $132, then we could get a second wind going that could be meaningful.

Obviously, it is terrific for the big international companies that the dollar gets weaker. But also keep in mind that the banks are stalled. If the banks start lending again -- as we saw this morning when Sears (SHLD) was able to get financing for a commercial transaction -- if you get banks taking share in Europe from their hobbled competition, that means food, drug, tech and banks could catch a bid.

That would be a major change in tone -- and one that is needed to break the sudden, newfound gloom I see taking over the market right now.

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