The euro could predict how stocks will do this year

By John Stepek

published 9 January 2015

in Features

150109-euro — The ECB's Mario Draghi could launch QE this month - and decide the fate of the euro for the year

The euro hit its lowest level against the dollar in more than nine years yesterday just under $1.18.

That also happens to be the price that the euro launched at, back in 1999.

So is the euro due for a rebound? Or is it set to go far lower before the year is out?

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

One way or the other, there's a good chance we'll find out by the end of this month.

Why it's worth keeping an eye on charts

But if you're a short-term trader, there's quite simply nothing else you can use. You cannot trade based purely on fundamentals, unless you like losing money. Expensive stocks and markets can and do stay overvalued for ages. Same with undervalued markets. If you are using borrowed money to play those markets, you run the very serious risk of being wiped out before your views come good, even if you're right in the long run.

In short, trading involves timing the market. The only way to do that sensibly is to realise that a lot of the time you will be wrong. Therefore you must have a clear view on where you expect a price to go and over what timescale. You also have to know exactly at which point you will get out of a trade.

It's not so much about predicting the future with the modern-day equivalent of chicken guts it's about only taking bets where the level of reward justifies the risk you are prepared to run.

With that in mind, even although I'm far more of a long-term investor than a trader, I do like to keep an eye on what smart traders are saying about the market.

Yesterday I noticed that US trader Peter L Brandt has pointed out an interesting pattern in the euro. Since it launched, it has nearly always set its low point or high point for any given year in the month of January (the big exceptions were 2004 and 2008).

Could it happen again this year?

There's certainly every reason for the euro to continue lower this year, particularly against the US dollar. The European Central Bank (ECB) is expected to launch quantitative easing (QE) finally. In the US, the Federal Reserve is expected to raise interest rates at some point. The threat of Greece leaving the euro also has the single currency on the run.

Brandt certainly thinks there's a decent chance that the euro could tumble further this year. And I have to say, it's what I'd expect too.

But it's always a good idea to question your assumptions, so you can be ready to react if things don't go the way you expect them to. It's particularly important in this case. Because the direction of the euro this year could really set the tone for 2015, as I'll explain in a moment.

The most bullish case for the euro

Firstly, the ECB launches QE on 22 January. But it's a weak form of QE, one that disappoints the market and makes it clear that the Germans, rather than Mario Draghi, are in charge. Secondly, on 25 January, Greece votes to stick with the status quo. Any existential threat that Greece poses to the euro is gone.

Those would both be positive for the euro. But they're not necessarily positive for markets.

A status quo' vote by Greece would see a lot of investors breathe a sigh of relief, certainly. And if the ECB also comes up with a satisfactory QE package, markets would be more than happy.

But if the ECB doesn't firmly commit to QE, and the Greeks aren't agitating to leave the euro, then the market will fear that there's nothing left to push the ECB to act.

As a result, global fear of deflation will increase, which could push back the date of any Federal Reserve rate rise. So you'd have all the conditions you'd need for a big euro rally. Not only that, without a fresh source of QE from somewhere in the world, you'd also have the right conditions for a major slide in the markets.

This isn't the scenario I'm betting on. I don't think Mario Draghi will be happy to launch QE until he is able to push through the sort of QE package he thinks it will take to deliver full-blown shock and awe. But the point is, there's a good chance that once again, the direction for the euro this year will be set, one way or the other, by the end of this month.

If you're a trader, that makes this a particularly interesting time to be looking at the euro. You can find out more about trading in general by signing up for our free MoneyWeek Trader email here.

But even if you're not, now's probably a good time to take a look at your portfolio and make sure that it's been rebalanced and that your asset allocation is roughly where you want it to be. If you're not sure what I'm on about, now might be a good time to sign up for MoneyWeek magazine. You can learn more about both in our complete guide to sorting out your finances for 2015 and you'll also get your first EIGHT issues of MoneyWeek, completely free.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.