Sunday, September 30, 2007

Buying Euros Will Prove Hazardous as Charts Flash Sell Signal

By Bo Nielsen

Oct. 1 (Bloomberg) -- The euro's record-setting rally may not extend through the end of October, according to analysts who rely on market patterns for their predictions.

No fewer than half a dozen indicators that measure the speed and slope of a currency's rise and foreshadowed the euro's three biggest slumps of the past year show the best may be over after it strengthened 4.7 percent last month to its all-time high of $1.4278. Citigroup Inc., the largest U.S. bank, says the euro may drop to below $1.37 unless the currency maintains its momentum.

``We are a little more cautious,'' said Tom Fitzpatrick, Citigroup's global head of currency strategy in New York. ``Whenever you see acceleration'' of this magnitude, ``it's a sign we may have a correction,'' he said.

The euro's appreciation is putting pressure on the European Central Bank to find a way to curb the gains. French President Nicolas Sarkozy and Fiat SpA Chairman Luca Cordero di Montezemolo complain that the rise in the currency shared by 13 European nations is hurting their economies.

Shipments from Germany, the region's largest exporter, fell 0.1 percent in July as the a stronger currency damped demand from Asia and the U.S., the Federal Statistics Office in Wiesbaden said last month. Reports last week that showed declining business confidence in Germany, France and Italy failed to dent the euro.

The currency may drop as low as $1.367 by the end of October, according to Citigroup and Zurich-based UBS AG, the biggest currency traders after Frankfurt-based Deutsche Bank AG. A Bloomberg survey of 45 banks and brokerages set the euro at $1.40 by January and $1.34 at the end of 2008.

Price Clues

Technical analysis, popularized by Charles Dow, creator of the Dow Jones Industrial Average in 1896, is based on the theory that a chart of the price of any asset or index contains clues about future movements.

Those indicators watched by traders say the euro is becoming too expensive. The currency's 14-day relative strength indicator reached 80.65, almost double a month ago. The gauge measures the momentum of price changes. Readings above 70 and below 30 indicate a reversal may occur.

The euro dropped 3.2 percent in the five weeks following the last time the index passed 80 in December 2006. It fell 3 percent in the seven weeks after the index exceeded 70 in the last half of April, and the currency tumbled 3.5 percent in the three weeks after it topped 75 in late July.

``Most technical indicators -- stochastic, momentum or relative strength -- are telling us the euro is extremely overbought,'' said George Davis, chief technical analyst at RBC Capital Markets in Toronto. ``The prospect for a short-term correction is getting bigger every day the rally is sustained.''

Trading Envelope

The difference in the number of wagers on an advance in the euro compared with those on a drop, known as net longs, was 83,448 on Sep. 25, down 2,601 from the prior week and twice the average in the last three years, data from the Washington-based Commodity Futures Trading Commission show. The last three times bets have peaked, the euro lost more than 1.5 percent the following month.

Trading envelopes, which measure how far from the mean a price has strayed, and commodity channel indicators showing when a currency is overbought also suggest that the euro has reached extreme highs.

Goldman Sachs Group Inc. advised investors last week to sell euros bought since Aug. 16 because indicators show ``the probability of consolidation is quite high,'' said Jens Nordvig, a New York-based strategist at the firm.

`Super Euro'

The euro's strength is becoming a drag on European growth. Europe's manufacturing and service industries expanded at the slowest pace in two years last month, according to Royal Bank of Scotland Plc. Paris-based Total SA, Europe's third-largest oil company, calculates that every 10-cent decline in the U.S. currency reduces its net operating income by 1.1 billion euros ($1.57 billion).

``The super euro worries us, we ask for the government and the ECB to do something,'' di Montezemolo said last month in Rome. ``This could become a problem for exports.''

Sarkozy said on Sept. 20 that Europe's competitiveness may suffer if the ECB doesn't cut rates. Credit-market turmoil pushed Europe's short-term borrowing costs to the highest in 6 years.

``There are signs that the problems in the U.S. are starting to affect the euro-zone,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``It's not a one-way traffic favoring the euro anymore.''

Too Early

Unless growth in Europe stalls, it may be too early to call an end to the five-year euro bull market that has seen the currency gain 66 percent versus the dollar and 46 percent versus the yen, according to Trevor Dinmore, a London-based currency strategist with Deutsche Bank.

The firm forecasts the 13-nation economy will grow 2.8 percent this year, compared with 1.9 percent in the U.S., and drive the euro to $1.45 by year-end.

The rise in the euro led central banks to increase their share of assets in the currency by 1 percent in a year to a record 25.6 percent. The share of assets in dollars has fallen to 64.8 percent from 71 percent in 1999, the International Monetary Fund in Washington said last week.

ECB President Jean-Claude Trichet will discuss the strength of the euro with his U.S. counterpart Ben S. Bernanke and finance ministers from the Group of Seven industrialized nations in a series of meetings starting on Oct. 19 in Washington.

In 2000, the group coordinated efforts to boost the euro after it had plummeted about 25 percent since its introduction in January 1999.

``G7 policy makers are getting concerned and may decide to do something about the euro,'' said the London-based Mansoor Mohi-uddin, global head of foreign exchange strategy at UBS. ``I wouldn't like to buy the currency at the current price.''

Last Updated: September 30, 2007 18:31 EDT

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