This commentary originally appeared on Real Money Pro at 2:10 p.m. ET today, Dec. 8. Click here to learn about this dynamic market information service for active traders.
When I started in the futures brokerage business in early 2004, the euro currency was in its infancy. In fact, at the time futures traders were more accustomed to speculating on currencies such as the German mark and the Italian lira (which no longer exist). I've since witnessed the euro become the primary speculative vehicle used by currency futures traders.
The initial listing price of the euro upon its creation was $1.1743. This means the cost in U.S. dollars of each unit of the euro was roughly $1.17. Following its inception, the euro weakened to roughly $0.80, but it soon recovered and never looked back.
We've continually heard the talking heads projecting the euro to fall below parity. In other words, they believe the cost of a euro in dollar terms could drop below $1 again. However, despite passionate and repetitive cries for a sub-dollar euro valuation, we haven't seen it since 2002, and the odds are we won't see it again any time soon. Although it is certainly possible the markets will test support levels and possibly even par as the global financial markets work out the interest-rate war, the euro will likely remain above 1.0 vs. the dollar.
Today's European Central Bank meeting is particularly interesting in that the ECB took a more hawkish stance than had been expected. On the other hand, it also padded the announcement with some dovish tones. Confused yet? So is the currency market. The ECB essentially expanded its bond-buying stimulus program by several months beyond the original timeframe, but at the same time, it will be cutting the size of the bond purchases. In the end, it is a net positive stimulus that is bullish for stocks but bearish for the underlying currency.
Remember, bond purchases are a form of interest-rate manipulation intended to hold yields down. The practice, known as quantitative easing (QE), injects cash into the economy and ideally promotes growth. In a post-meeting press conference, ECB chief Mario Draghi insisted that this move was not "tapering" (a reduction of the size of the stimulus program) because the program was being extended in regard to time. Further, the ECB added that if "the outlook becomes less favorable or if financial conditions become inconsistent with further progress toward a sustained adjustment of the path of inflation," then the central bank would increase the program by either increasing size or duration. Prolonging a tapered stimulus with a backstop was celebrated by the equity markets, but the euro currency bulls took it on the chin.
Aside from today's bloodbath in the euro, the long-term prospects for the currency don't look bad as long as the market manages to hold support. In fact, it is possible the euro is putting in some sort of triple bottom.
Looking at the daily chart, the short-term prospects aren't as promising as the longer-term, but there are still some signs of a limited downside. Given the newfound bearish momentum, it seems likely we test the trend channel support near $1.05, and we can't rule out a massive long squeeze putting us just under $1.04; nevertheless, the beaten-down currency is probably a better "buy" down here than most are giving it credit for.
Our friends at Consensus Inc. have determined that bullish sentiment in the euro has fallen to roughly 30%. Generally, when the majority of traders are bearish, as is now the case, the path of least resistance, in the long run, is bullish.
Nevertheless, this doesn't mean any potential euro rally will be immediate. Nor will it be without hiccups, but the reality is we could be in a situation in which all the bearish news is out and the bears have already reacted to it. If this is the case, the tides could be turning in the coming weeks.