Euro Traders Bracing for Test of “Lehman Low”

The EUR USD touched its lowest level since October 2008 onFriday as investors continued to pull out of the currency on the fear thatpolitical and economic problems will lead to a collapse of the Euro Zone economy.

The EUR USD touched its lowest level since October 2008 onFriday as investors continued to pull out of the currency on the fear thatpolitical and economic problems will lead to a collapse of the Euro Zone economy.The rapid decline is pushing toward the so-called “Lehman Brothers Low at1.2329. This support was established at the height of the global credit crisisand marks a time when a global financial disaster was avoided.

Although some feel that the world’s financial system isbetter prepared for a credit shock than it was back in 2008, a break throughthis level will have psychological ramifications as well as symbolic meaning.It will be used as a benchmark among global investors who will question whetherthe world has learned anything following one of the greatest financialmeltdown’s in history.

Besides the risk of sovereign debt default, investors arenow becoming concerned about the lack of activity and the inaction from theEuropean governments. Once again investors are asking the question “where isthe union in the European Union”.

The inability to stop the slide in the Euro by pumping $1trillion into the economy with basically debt on top of debt has convincedinvestors that the EU has and had no plan to prevent the kind of currencyslaughter taking place at this time. Investors have grown weary of the reactive moves by the governments andwant to see more proactive action.

From the start investors have been asking for clarity fromthe EU. No one wants to see a currency collapse, but without a firm plan inplace investors have had no options to consider except to sell the Euro.

Friday morning’s selling pressure was rumored to have beentriggered by a story in a Spanish newspaper saying that French President NicholasSarkozy was threatening to pull out of the Euro. Although his statement hasbeen denied a few times this morning, traders don’t seem to believe the denial.

Although the French have denied the negative statement fromPresident Sarkozy, the Euro continues to remain fragile. After Sarkozy’sdenial, rumors began to circulate that serious discussions may be going todecide the ultimate fate of the Euro. At this time emotions are running high inthe Euro Zone as it is becoming clearer that the financial cuts necessary tomake Europe financially sound will have hugeglobal ramifications.

Even former Federal Reserve Chairman Paul Volcker has agloomy outlook for the situation. On Thursday during a stop in London he said “You havethe great problem of a potential disintegration of the Euro. The essentialelement of discipline in economic policy and in fiscal policy that was hopedfor has so far not been rewarded in some countries.”

As support continues to erode for the Euro discussions willincrease as to how it will survive when there continues to be such a hugedisparity between those countries that have and those nations that have not.

The plunge in U.S. equity markets led to a sharp breakin the USD JPY. Traders were divesting out of higher yielding assets and intothe safety of the lower yielding Japanese Yen. The chart pattern suggests thata further decline to 91.61 is likely over the near-term. A failure to hold thislevel will fuel an acceleration to the downside. Much of the downside movementin this currency pair hinges upon how the global equity markets will react ifthe “Lehman Low” at 1.2329 fails to hold as support. With emotions very high inthe equity markets, chances are strong that the Japanese Yen will continue torise.

Weakness in the Euro spread to the British Pound as theeuphoria from this week’s creation of a new government has apparently worn off.Investors were nervously watching the events in the Euro Zone unfold with thethought that the same issues can quickly spread to the U.K. At this time, the June BritishPound is holding last week’s low at 1.4476, but downside momentum can push themarket through this price at anytime.

Thursday’s closing price reversal bottom in the USD CAD wasconfirmed early in the trading session on Friday, putting this pair on a pathtoward to 1.0423 to 1.0498. The dumping of higher risk assets led by equitiesand crude oil were the catalysts behind Friday’s decline. Planned austeritymeasures by Europe are also likely to have anegative impact on Canadian exports which should serve as the fuel for morestrength in the Dollar/CAD.

Falling stock prices put pressure on the AUD USD but did notreach the point of panic. For most of the day, the Aussie traded weaker in anorderly fashion as traders reacted to the weakness in U.S. stockmarkets and the exodus from higher yielding assets. Traders should brace for apossible sharp decline on Sunday night however. If the Euro pierces the “LehmanLow”, panic may set in the global equity markets, driving more traders out ofhigher risk assets. It all depends if the break is market driven or eventdriven.

A similar repositioning is taking place in the NZD USD.Investors sold the Kiwi in sympathy with the U.S. stock market break, but there wasno sign of panic selling. So far everything has been orderly. This may bebecause of lessons learned from last week’s panic sell-off. Traders didn’t wantto overreact like they did last week Nonetheless,investors should be aware that a further deterioration in the Euro Zone economycould have global ramifications which will put downside pressure on the NewZealand Dollar.

While there is much discussion going on at this time aboutthe “Lehman Brothers Low” in the Euro at 1.2329 and how the Forex markets willreact if this low is breeched, investors should note that the market tradeddown to this level during the height of the 2008 credit crisis. Breaking thislevel will have more of a psychological impact on the Forex markets which meansthey will be tradable. Another lock-up of the credit markets, however, shouldprove to be a disaster.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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