Friday, 1 June 2012

Explaining the Forex Market after the Euro Collapse

The Euro has reached a four month low after a financial crisis in the major economies
Most people accept that the Euro is going to face plenty of turbulence over the coming few months. Although the politicians are saying otherwise, there are rumors that Greece and Spain might exit the regional currency in the future. The question for traders is how they handle the fluctuating market. Will it be an opportunity or hindrance in the future? What about existing stock?
The biggest headache for financial analysts is the threat of a wholesale exit of the major European economies that have been relying on the Euro. A Greek caretaker government has been put in place until the second round of elections between the 10th and 17th of June. Joshua Raymond from City Index points out the political dimensions: "It remains open for debate as to just how much authority any caretaker government may have." [1]
The volatility of the forex markets
Investors are not confident about either the recovery or the measures that have been put in place as a means of triggering that sort of reaction. The US dollar is the winner because it is perceived to be a safe (albeit boring) bet. Lauren Rosborough from the Societe Generale SA argues that risk aversion is become a reality in the market today. As the Euro fell by 1%, the USD rose by 1.1% according to the Bloomberg Correlation Weighted Index.
It is very important that investors do not place all their bets on the US Dollar. For example as the Eurozone crisis deepens, the ramifications are likely to touch other currencies. At the moment the USD is at the lowest level it has been in half a year. In some areas it was 97.98 US cents. The last time it fell lower than that figure was on the 29th of November in 2011.
Tony Darvall from Easy Forex argues that comments such as the one made by Mike Smith (ANZ CEO) affected investor decision. [2]He said that credit markets were closing and therefore banks were reducing lending portfolios. These financial institutions are running out of cash to spare: "People are wary; people are very scared…That's why you're seeing stock markets under pressure and Australian banks under pressure."
Do investors have alternatives?
One of the options that might work is gold. This precious metal is unlikely to lose its value over the longer term because it never physically deteriorates. Of course the relative value placed on it is likely to fluctuate with investor perceptions. At the moment it seems like a relatively safe bet given the problems that both the Euro and the USD are facing.
Is this the time to take a significant risk on the forex market? The seasoned investors know that strategies depend on whether the person is in for the long run or if they want to cream off short term profits. Currencies like the Euro on the other hand can collapse completely in a matter of days. Unless the politicians can get their act together, this increasingly looks likely.
  1. WDM Group,” How to Trade Forex as Euro Reaches Four-Month Low”, 16th May 2012, Business Review USA,
  2. AAP,” Dollar down on eurozone fears”, 18TH May 2012, Herald Sun,

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