FOREX TRADING: CAN THE EURO OUTLAST TODAY’S GREEK TRAGEDY?

by Vincenzo Desroches, TheBusinessEdition Finance Columnist

As seasoned traders in foreign exchange, we are wise to remember that success is dependent on three qualities. We must have the knowledge necessary to form interpretations of current events and how they will impact the future direction of prices. We must have the battle-tested experience necessary to execute wise judgment in the face of pressure in all our decision-making activities. And lastly, we must control our emotions with well –disciplined approaches to buying and selling our various trading positions. Current events in Europe are placing the spotlight on the former of this triad, as the Euro infrastructure is encountering its first real test in ten years.

Assimilating all of what’s out there on currency trading can be a daunting task. Interpreting the future impacts does require experience and a healthy respect for the past, but when the realm of possibilities is endless, it helps to check other markets for information, combine a little history, and then review what the leading forex brokers and pundits in the industry are saying on the topic. First, a bit of history is in order.

The advent of the Euro in 1999 was the latest installment in the continuing story of attempts to move towards economic and monetary integration in Western Europe. Political moves towards monetary cooperation in Western Europe began at the end of the Second World War. Initially there was the Bretton Woods “adjustable peg” system, followed by the “Snake”, which was replaced by the European Monetary System, EMS. The EMS collapsed in 1992. Each attempt failed due to unstable membership rules and the lack of a central authority to dictate corrective economic action.

The difference with the Euro this time around was that a coordinating infrastructure was put in place, and to prevent a return to old ways, the European Commission disbanded all national currencies for its members. The goal was to gain parity with the Dollar, but the Euro swiftly accumulated a 15% premium post conversion. U.S. deficit and import issues further deteriorated the Dollar to the “1.40” level, although current events have shaved 10% off that figure. The European Commission must now move quickly to respond to its crisis and bolster the Euro to previous levels. The test will be whether they have the power to institute austere economic measures on respective member states. Riots in the streets of Athens would seem to suggest otherwise.

A cursory review of the commodity markets reveals turmoil over future crop prices. Wheat futures in Chicago fell as the Dollar strengthened last week. Planting season has begun in earnest in America’s heartland, and forecasts of future commodity prices had assumed that the Dollar would continue its generally weak course for the remainder of the year. Long-term Dollar forecasts prepared at the beginning of the year presumed a gradual world economic recovery, accompanied by a weak dollar that would keep export demand high. Debt issues in Greece, Spain and Portugal would appear to dismantle those key assumptions, implying weak export demand from Europe.

Industry experts have been quick to note ways to profit from the stronger Dollar, but most remain cautious that short term events are merely a short-lived phenomenon. With the U.S. budget deficits appearing to be insurmountable, the long-term fundamentals for the Dollar are anything but optimistic. There seems to be a dichotomy developing between short and long-term forecasts for the Dollar, which generally means more volatility in the market. Volatility represents opportunity as supply and demand forces increase the amplitude of peaks and valleys. Wise traders understand that profits flow more easily under these conditions. The longer this Greek Tragedy plays itself out on the international stage, the better.

Current events in Europe are raising doubts as to whether the Dollar will return to its weak course for the balance of 2010, thereby encouraging strong demand for U.S. exports. Unfortunately, the jury is still out. The ultimate verdict will surely depend on the strength and resolve of the European Commission to deal with the first real test of its Euro based system. Although we may have to observe this game from the sidelines, the volatility is welcome, but it is just one more example of how interdependent our markets have become in these days of globalization.

Vincenzo Desroches loves all things related to Finance and Money.