Euro Overvalued At Current Levels And Due For A Sell Off

Includes: ERO, EU, FXE, MCD
by: Elite E Services

Europe's demand for steel fell 8% in the last year, according to the world's largest steelmaker by volume.

Steelmaker ArcelorMittal (NYSE:MT) on Friday took a $4.3 billion write-down on the value of its flailing European division and said it sees little prospect for an improvement in the region's sluggish economy any time soon.

Luxembourg-based ArcelorMittal, the world's biggest steelmaker by volume, said the goodwill-impairment charge will be included in its fourth-quarter earnings. The news resulted in a downgrade by Fitch Ratings, the third by a ratings firm since August.

The significance of this information is that it shows that real demand for steel in the 'real' economy (manufacturing, shipping, etc.) is down, whereas in the U.S. it's up. For Europe, this is a bad economic sign. Similar to the Baltic Dry Index, a decline in steel indicates a decline in the real economy.

If GDP was down 8%, it would be seen as a game changer. But how is steel that much different? Of course a measurement in steel use wouldn't include the service industry. But in Europe's case we are also speaking about the great manufacturing northern states as the backbone holding up the eurozone. If they are declining, what's left to keep the euro up except their friend Ben across the pond?

A few other data points

  • Forex volume declined for the first time in years. There is no official explanation for this, other than economic factors, and traders and businesses sitting on the sidelines because of the fiscal cliff.

  • The Fed is gearing up for a QE-Infinity for 2013 and beyond, which can only drive the euro higher, at least in the short term. This might be the biggest explanation of the high levels of EUR/USD at the present moment.

  • European secessionist movements are spreading beyond the PIGS, to smaller regions and even provinces such as Venice, Finland, Catalonia, and others.

  • EES has obtained local info from our partners in Europe who have described anecdotally the problems austerity is causing. Those who are affected by the real economy are being squeezed; taxes are increasing and revenues are decreasing.

Value of EUR/USD

Based on the above factors, and based on the fact that interest rates are no longer a factor like they used to be, EUR/USD should be more in the 1.20 level. This would indicate a sell signal, however we've written several articles about the euro peaking, and about selling EUR/USD and while we have picked a few short-term tops, the trend has been slowly higher. During the time when the euro peaking article was written on September 21, 2012, the EUR/USD was 1.29, now it's 1.3180 but hit as high as 1.3306.

Many strategy variants may apply here, such as simply selling EUR/USD outright or selling on spikes. Whatever the strategy, the suggestion based on available analysis is to hold a bearish view on the EUR/USD as it seems to be overvalued.

Those with European assets or U.S. companies that do a lot of business in Europe should also pay attention. Companies such as McDonald's (NYSE:MCD) that derive a lot of profit from the eurozone can be hit twice; a declining currency in addition to declining orders. The EUR/USD may be getting a short-term boost from the Fed, but this will not last. So traders should be ready to sell EUR/USD in their portfolios, or take profits on any longs established. There's not much upside here, and potentially 1,000 pips or more of downside.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Forex Risk Disclosure: The risk of loss in trading foreign exchange markets, also known as cash foreign currencies, or the FOREX markets, can be substantial.