Home > Main > A Euro head and Shoulders means a booming Germany?

A Euro head and Shoulders means a booming Germany?

January 10, 2011

When I look at the chart, I think maybe it is:
But when the Euro was down in the 1.20 area, Germany and France were going gangbusters. Germany and France make up a lions share of the Eurozone in terms of GDP – strap on Italy and Spain and you have a solid majority of the GDP concentrated in these 4 countries.

At some point not far from here, the short EURUSD trade becomes self-defeating.  As the Euro gets lower, Germany grabs exports.  To lesser extent, France, Spain, and Italy do as well.  This is why China is always making statements about supporting the Euro – it has nothing to do with liking Greek debt, and everything to do with liking exports to the U.S.

But let’s just look at this head and shoulders for a second.  The head to neckline distance is: .1409  A dive from the 1.2872 level means the target for the Euro head and shoulders is 1.1463.  That is well below the June lows of 1.1891, and a remarkable  10.9% below the neckline.  This is a rather large formation, and would likely take a few months to deliver this target.

So the average price of the Euro over the quarter of that it takes to reach the target, and possibly recover a bit from the target price end up something close to 1.2100 (1.2800 – .1400/2 = 1.2100).  When Germany threw down its huge 9% GDP quarter, the Euro averaged 1.2637.  Hitting the head and shoulders target would result in an average Euro price over Q1 4% lower than the 9% quarter.

The DAX did not go anywhere during Q3. My real time view of this was that nobody suspected the economy would be this strong – and this is supported by the post release, gap move upwards.

However, nobody will be surprised today. It has become common knowledge that exports drove the Q3 GDP and that Germany business confidence is booming.

People tend to like stocks and bond markets where you’re getting 9% plus GDP growth – ask China or Brazil.

As a result, I do not think the Euro will reach the Head and shoulders target of 1.1463.   As the Euro gets lower, the sovereign finances of France and Germany get much, much better.   Spain and Italy have done a bit better than expected in their deficits as well.

German companies look extremely undervalued if they are putting in 15% YoY top line growth.

This is not to say the Euro will not make another run lower, but reaching the 1.1460 level is unlikely, simply because the reasons for the trade (sovereign debt defaults) are related to how much Euro countries can export. As the Euro gets weaker, their exports get exponentially more attractive, and people will start to buy Euro products and lock in rates with forwards.  This action puts a natural floor under the Euro.

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  1. June 1, 2011 at 10:58 am

    I think this idea is truly.
    A Euro head and Shoulders means a booming Germany?
    and you?

    • TC
      June 1, 2011 at 11:03 am

      I cannot tell if this is spam but it sure looks like it

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