The recent US Dollar strengthening against the EUR/USD and AUD/USD in Asia has created a USD/JPY (U.S. Dollar/Japanese Yen) spike as traders begin to pay attention to the possible impact of the Forex market with the potential for an interest rate hike from the Federal Reserve. This will only be good news for USD/JPY traders, especially with the current trend towards stronger U.S. Dollar. We previously published our AMEX Forex Buying Guide for Asian Stocks, which highlighted some of the best AMEX buys to make in the face of weakening USD by strengthening your dollar denominated counterparts. The latest US Dollar strengthening against the EUR/USD and AUD/USD is providing further incentive to invest in the EUR/USD and AUD/JPY when the market indicators suggest that this could be an important moment in the history of these currencies. In this article, we will discuss why the EUR/USD should be a strong buy during the U.S. Dollar strengthening event.
The recent economic data released by the European Central Bank (ECB) confirmed our view that the EUR/USD could be susceptible to heightened risks in the event that the Fed elects to raise interest rates. The European Central Bank cut its key interest rates last month in an effort to stimulate the economy in the wake of the recent global financial crisis. Economic data released on Thursday showed that industrial production in Europe rose by just 0.1% on the month, compared to a rise of 3.4% in May. In addition, industrial inventory dipped slightly in June, but economic data released on Friday indicated that industrial production is expected to pick up in the coming months.
In addition to the possibility of heightened risk associated with increased rates, the recent negative reaction to the European Central Bank’s measures could also weaken the EUR/USD. The EUR/USD has already lost ground against the USD over the past two weeks. The recent move by the ECB was viewed by many investors as having political overtones, which resulted in sharp depreciation in the pair against the USD. If the ECB continues to take action against the Euro, it could dampen the effects of its recent actions on the EUR/USD.
{T aud/usd (augmentment agreement document) Should the ECB proceed with its plan to reduce the Euro, the impact on the USD/EUR would be significant. The EUR/USD would likely become more sensitive to any moves in either direction. Trade participants are starting to look at ways to counteract the effect of the ECB’s actions on the euro. The Swiss National Bank recently released a report that indicated that Swiss banks hold around 1 trillion CHF in foreign currency deposits – more than half of the total assets of the Swiss economy. If this figure is confirmed the implications for the Swiss economy are potentially large.
{T aud/usd (augmentment agreement document) The prospects for a further decrease in the EUR/USD are also dim. The recent move by the ECB was triggered by a proposal from the European Commission to reduce the role of the European Central Bank in the determination of the values of the euro and other major currencies. If this proposal is approved, the impact will be limited to the countries that are part of the Schengen Agreement. If the Commission decides to push through this scheme and the ECB follows through, it will certainly cause a marked depreciating effect on the EUR/USD. For now, traders believe that a continuation of the ECB’s loose monetary stance is unlikely, especially since most economic indicators point to the fact that the euro-zone economy is in recovery and that it is not recessionary.
{T aud/usd (augmentment agreement document) In order to understand why the EUR/USD might strengthen or weaken in response to an ECB intervention, a more detailed analysis needs to be done. First of all, what is driving the ECB? Does it want to increase its balance sheet in order to provide financial support to its own banks, which are currently suffering from a prolonged recession that has resulted in record high borrowing costs for them? Or is the Commission itself trying to gain access to the strength of the non-domestic private sector banks in order to bolster its own flagging financial market? If the latter is the case, then the impact of the ECB’s decision on the EUR/USD would be limited.
{T aud/usd (augmentment agreement document) However, if the reasoning behind the ECB’s plan is based on the argument that the exchange rate between the two currencies is too sensitive to allow free trade while maintaining competitiveness, then the impact on the EUR/USD could be quite large. The low trading rates between the currencies imply that there is still some scope for investors to purchase underpriced foreign assets in the hope of making profits by shifting the risk of investment from domestic to foreign sides of the trade. The ECB has the ability to print more money to pay for its fiscal deficits, offsetting its excessive foreign borrowing costs. This is in effect a form