Let’s Get Ready to Rumble!
Don’t you just love a good boxing match?
One of my favorites was Evander Holyfield vs. Mike Tyson. I was still a young trader at the time, but I still can’t get some of the images out of my head.
Now I can’t say Obama will try to bite Merkel’s ear off at this weekend’s G-20 meeting like Tyson did back in ‘97, but it should be just as intense.
In fact, Merkel even said on June 11th that she “expects to have a hard time” at this weekend’s summit. What’s this “hard time” all about?
In short, Obama and Merkel have two different priorities right now…and they both have major implications for where the dollar and euro will head next.
Spend More or Cut Back…That’s the Question
Obama wrote a letter to his G-20 counterparts and encouraged them to focus on “growth.” But the Chancellor of Germany, Angela Merkel has already set the tone by rebuffing the U.S. calls for growth. Instead, Merkel says that they need to focus on “debt reduction.”
Obama may have his work cut out for him because it seems Canada is already siding with Germany.
Canadian Prime Minister Harper has already sent a letter of his own to his fellow G-20 members. He wants leaders to reduce their deficits by half by 2013 and begin reducing their debt-to-output ratios by 2016.
A senior EU finance official has already chimed in saying the Canadian proposal “should be a minimum.”
But wait! It gets better.
On June 19th, the European G-20 members released a video saying that “deficit reduction” would be a central theme in the Toronto meeting this weekend.
In other words, Obama wants all the leaders around the world to keep spending to promote growth, while Germany, Canada and others want everyone to start reducing their debts.
Now you can see why Obama will have a “hard time” at the G-20 meeting. Merkel may have more of a posse than she thinks! Ha-ha!
The Euro Road Is About to Get Bumpy!
So what does this mean? It means there will be more volatility in the EUR/USD pair (the euro vs. dollar) as these 
two countries duke it out.
It’s pretty simple. You can’t cut deficits and encourage strong growth at the same time. It’s like deciding to pay off your credit card bill, and remodel your house with that same line of credit. It can’t be done. So they’re going to have to pick one.
No matter who wins out, the EUR/USD will be dancing all over your currency screens thanks to this weekend’s meeting. That’s great news for the trader, but its horrible news for if you’re a currency hedger or exporter.
I also think that this very well could end the EUR/USD bounce higher and cause it to resume its ugly downtrend.
Currencies hate uncertainty and the euro is already the most uncertain of the majors right now. This standoff between Obama and Merkel will just make traders feel uneasier about the euro. So my money is on the euro falling and the dollar rising after this weekend’s meeting.
In fact, it’s already beginning to happen. Check it out on the four-hour chart below.
EUR/USD Just Broke its Near-Term Uptrend as Obama
and Merkel Get Set for this Weekend’s Match
Remember, it takes a trend in the currency market a while to turn around anyway. (Currencies move slowly – making big sweeping turns more like cruise ships than speed boats.)
Just as a reminder, check out the daily, 1-year chart of the EUR/USD pair below.
I run across traders who don’t understand this. They say the U.S.’s problems are just as bad as the EU’s problems. So they’re going to buy the EUR/USD and simply hold onto it.
Now I understand where they’re coming from – the U.S.’s problems are just as bad (if not worse) than the EU’s. But regardless, the euro’s long-term trend is still south because traders are searching for the safe haven currency. That will push the dollar up and the “anti-dollar” down.
In the end, the market is always right and the only way you can make money is if you go along with what the market is telling you.
It’s not likely that tomorrow’s Fed interest rate decision or the G-20 meeting will change this downtrend anytime soon!
So look for this bumpy, volatile downtrend in EUR/USD to continue onward as uncertainty remains the “order of the day” as stock and commodity markets continue to weaken. This means a weaker euro and a stronger dollar.
(And don’t forget…the G-20 boxing match begins this weekend. Should make for some good market entertainment!)
Happy Trading,
Sean Hyman, Professor FX
Editor, Currency Cross Trader
P.S. I’ll be giving my subscribers a play by play of this boxing match in upcoming issues of Currency Cross Trader along with best and easiest way to tap into this long-term downtrend for the euro. (I call it the “lazy man’s way to trade Forex.”) Hear how it’s done …
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