It seems years ago, but it has only been seven months since the euro was reaching new record daily highs against the US dollar, eventually tapping out at $151.43 on November 26, 2009. The currency has been on a steady decline since those heights and plummeted to $121.32 just this week. For much of the time the euro was falling crude futures kept on rising. These past few weeks have seen a swift 20% correction in crude, bringing crude futures back in line with the reduced value of the euro.
The euro has appeared to come full cycle from everyone wanting to own it, to everyone wanting to sell it. Now that crude has made an adjustment to the lower euro, the next adjustment will be made by European Union exports. The lower currency is just what the doctor ordered to help Europe get out of its debt crisis. Germany in particular with its high reliance on exports will benefit greatly by the reduced costs of German goods. I would not be surprised if the European Central Bank tries to push interest rates to 0% to further deflate the currency.
With German factory goods leading the European Union in the months ahead out of economic stagnation, the consequences will eventually be the raising of interest rates, followed by an upward trending euro. This of course means crude futures will need to adjust higher to compensate for a strengthening euro.
The timing of how quickly this scenario will play out is not definite. Markets always seem to over shoot until there are no more interested buyers or sellers. We may have hit the bottom in the euro sell off, but it is more likely that support will be found on the $115 to $120 levels. If that is the case, crude likely to keep heading lower until it begins to attract heavy buying in the $65 to $60 area. We are likely to see more traders begin taking off short positions and reversing course to the long side over the next several weeks.
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