Back in December when we wrote our post “Is It Finally Time To Sort The Euro” we got a lot of flack for saying that the US Dollar was bottoming out and that the Euro was going to drop. We received e-mails telling us about all of the problems with the US and why the Dollar is going down forever. Our basic answer has been that while the US has tons, and by tons we mean trillions upon trillions, of problems the US Dollar is not going the way of toilet paper anytime soon.
While we knew of many of the problems in the EU when we wrote our post we had no idea how bad and how fast they would manifest themselves. As you can see in the chart below since our post the Euro has broken down, consolidated at the 200-day moving average, and then broke down some more. (Click on cart to enlarge)
EUR/USD Daily Chart
So what do we see going forward? In our earlier post we showed a chart of the EUR/USD purchasing power parity that showed the Euro as being 35% overvalued relative to the US Dollar. As you can see in the chart below the Euro has narrowed the valuation gap considerably but is still 22% overvalued to the USD. We would not be surprised to see the EUR/USD hit the 2008 lows around 1.25 before finding strong support. (Click on chart to enlarge)
EUR/USD PPP Chart
Disclaimer: In The Macro Trader newsletter we are short the EUR/USD