The Euro and The Dollar Are Balanced Here (FXE, UUP, VGK, FXC, FXI)

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November 22, 2011 1:40pm NYSE:FXE NYSE:UUP

Richard Rittorno: Traders have been scratching their heads with the euro’s ability to hold up despite all the euro zone negative developments, including the latest news of Moody’s downgrade warning on France’s credit rating. The crisis has officially spread from the periphery countries to the core.

On the other hand, the buzz over the failure of the “super committee” is weighing a bit on the dollar (NYSEARCA:UUP) as well, giving the euro the strength to hold above key short-term support at $1.3420.

Still, adding to the euro’s (NYSEARCA:FXE) misery are comments from the World Bank that Europe’s (NYSEARCA:VGK) debt has now gotten extreme enough to endanger the Chinese economy. Any kind of slowdown over in China will likely have a negative impact on the global recovery, feeding back for all risk assets.

Our analysis continues to forecast a slowdown in China (NYSEARCA:FXI) which will represent the third wave of the global recession.

The monthly chart for the EUR/USD continues its steady downtrend since the euro hit a high back in 2008 and is now in the process of targeting a major lower top well below $1.50 on the way to what looks like a low under $1.30.

If the $1.20 support level is broken, the euro can see further acceleration to the downside, but let’s not put the cart before the horse as price action still needs to break upper support.

On the flip side: Over the next few weeks EUR/USD runs the risk of short-term selling in the U.S. dollar — whether the motive is profit-taking, fears from the failure of the not-so Super Committee or the simple fact price never goes in straight line.

Fundamentally, traders can only speculate reason for the euro finding supported which could translate to a mover higher in the short time above $1.37. Pullbacks in the U.S. dollar have been opportunity in the past to buy the U.S. dollar and we see this thesis to remain in tack unless the price in the EUR/USD breaks above $1.38.

We maintain our position of selling rallies in the EUR/USD until the either fundamentals or technicals suggest otherwise but currently both line up nicely at this point in time.

Non-FOREX traders can exposure to U.S. dollar via the Power Shares US Dollar Index Bullish Fund (NYSEARCA:UUP). This ETF seeks to track the price and yield performance, before fees and expenses, of the Deutsche Bank Long US Dollar Futures index.

The index is comprised solely of long futures contracts. The futures contract is designed to replicate the performance of being long the US Dollar against the euro, yen, British pound, Canadian dollar (NYSEARCA:FXC), Swedish krona and Swiss franc.

Written By Richard Rittorno For Emerging Money

Emerging Money provides insightful and timely   information about the increasingly important world of Emerging Market   investments. CNBC Emerging Markets Contributor Tim Seymour leads the   team of Emerging Money to bring you cutting edge global news and analysis.

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