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.
Resources:
- WDM Group,”
How
to Trade Forex as Euro Reaches Four-Month Low”, 16th May 2012,
Business Review USA, http://www.businessreviewusa.com/press_releases/how-to-trade-forex-as-euro-reaches-four-month-low
- AAP,” Dollar
down on eurozone fears”, 18TH May 2012, Herald Sun, http://www.heraldsun.com.au/business/australian-dollar/dollar-down-on-eurozone-fears/story-fn7j1bhl-1226359933150
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