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How You Can Profit from Economic Decoupling
The largest bond fund in the world, PIMCO, released their cyclical outlook recently, which discusses how the three major global economies of the US, Europe, and Japan, have decoupled. What that means to you as a trader, is that there are more significant opportunities in the forex market then before. Usually, these countries have similar economic outlooks because of how interconnected our global economy is. Today, though, Europe and Japan are suffering particularly more than the United States, which is bouncing back faster from slow economic growth.
The differences have arisen from the European Central Bank's lack of coherence in formulating a focused strategy on combating stagnating growth. In contrast, the Federal Reserve in the US has literally thrown tons of money at the same problem, and so far has had more success. At this point, the ECB is still unwilling to do what the Fed has done and initiate outright asset purchases in order to increase lending and economic activity.
"Our economic forecast for the next 12 months calls for a... long frequency U.S. business cycle recovery, with growth between 2.5% and 3.0%.
The eurozone economy should grow by about 1% in the next 12 months, continuing a painfully slow climb out of a double-dip recession.
We expect Japan will grow by around 1% to 1.5% in the next 12 months, and China’s growth is likely to slow to around 6.5%..
Saumil H. Parikh of PIMCO"
Euro
What this means for the Euro is exactly what we have been saying for the past two months. It is bad for your health to buy EUR/USD and it will continue to be bad for your health further down the road. Even though the pair has made new multi-year lows day-after-day, retail traders continue to rush in and catch this falling hatchet. The result is that many retail traders keep getting their hands lopped off.
The fall is not over and our further expectation is that it will fall towards 1.2740 in the near future. For the longer term (year 2015) 1.23 is likely. What this means for retail traders is that patience and timing is needed in order to sell into rallies of anything from 60 to 100 pips and ride the retracements down for the same amounts.
Japanese Yen
There is probably less upside opportunity for the USD/JPY than there is downside for EUR/USD. We believe this is because the market is has already priced in a significant portion of the quantitative easing the Bank of Japan has initiated (remember that the Yen has grown over 40% against the dollar in a period of just two and a half years).
Still, we do expect that a test of 110.80 is likely and that it will happen sooner rather than later.
The information provided is for educational purposes only and should not be considered as investment advice.