Charting Asia

Greek Contagion Could Drag Euro Below $1.19: Charts


The U.S. dollar Index has rallied quickly above $0.815 and has a clear run towards $0.89. There is minor resistance near $0.84. A strong U.S. dollar brings a new range of tensions into trading relationships. This puts pressure on the Australian dollar .

Gold , which is normally a beneficiary of this type of market confusion and instability, has continued to drop below the long-term upward trend line. Downside support is near $1,440 an ounce.

The speed and severity of the effect underlines the comparative weakness of many economies as they still struggle to climb out of the wreckage of the Global Financial Crisis.

The GFC is not over, and it’s too soon to say if the current Greek inspired tragedy is the final act or just a prelude to a much more dramatic finale. That result will be determined by the resilience of economies such as China and the U.S.

These are confusing and unexpectedly contradictory reactions. This signals two things. The first is that investors must use extreme caution in this environment. Traders must be more nimble and quick footed than in other market conditions.

The second is that this environment makes analysis difficult so conclusions must always be confirmed with other verifying behavior. The balance of probabilities is not clearly tipped one way or the other.

The euro-dollar exchange rate gives an indication of investors’ views of the health of the European economy. The euro-dollar weekly chart is dominated by a strong and well established downward trend that has been in place starting 2011, May from the high at $1.49. The recent rally failed to touch the trend line before starting on a new downward trend.

The first key support level was near $1.29 and the market has dropped below this level. The fall below $1.29 has the next support level near $1.24. This defined the limits of euro weakness in 2008 and 2009 so there is a high probability it will again provide good support.

The downward trend pressure is well established so there is an increasing probability the euro may fall below $1.24. In 2010 the euro dipped to a low of  $1.19, which was also near the 2005 lows. Unlike now, in 2005 Europe was not convulsed with monetary and economic indecision.

Falls below $1.24 are not unprecedented. In 2001 the Euro was trading at $0.88. The acceleration and spread of the Greek contagion has the potential to drag the Euro below $1.19. It is no longer an unthinkable outcome.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

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