Institutional news

Institutional news has the potential to be the biggest mover of them all but, again, it is often used for shock effect to get a move that was already pre-ordained by the technicals on the chart.

Consider the rejection of the European Union Constitution. The first “no” vote came from France on May 29. The Euro had already swooned from above 1.3600 to 1.2535 on May 27, so it was hardly a surprise the public’s rejection of the constitution took the Euro further down to 1.2385 on May 31 and 1.2159 on June 1, when the Dutch voted.

The failure of the Europeans to forge a constitution is a reflection of dissatisfaction with the way the EU is working and evolving, a malaise some analysts say could even spell the end of the Union. Any system that delivers low growth and persistent high unemployment may have a humane social model, but it cannot be said to be a successful economic model. However, the Euro stopped dropping barely one month later, in July 2005. Nothing had changed. Europe was still rejecting the principles of ruthless capitalism and market economics, still turning its head from competition and open borders (for services, at least), and still (mostly) against enlargement to include countries like Turkey and even the Baltic states.

Did traders forget the giant risk to the European experiment only one month after this stupendous failure? In a word, yes. And the reason is not hard to find — the trains are still running, the stock markets are open (and rising), banks are still busy acquiring one another, and business goes on as before. Most of all, nobody — not even the Italians — is seriously considering the death of the Euro and a return to the legacy currencies. The Euro is a done deal. The accounting has all been switched over, the old banknotes burned.

The market was willing to respond to the rejection of the Constitution right after the vote because it was consistent with the trend already in place, but it was unwilling to let it hang like a stone around its neck for very long, especially when the Euro was approaching the “historic” low from May 30, 2004 at 1.1760. This level is very close to the January 2, 1999 euro launch rate at 1.1670 and the opening price the next day at 1.1786.

We have no idea why a return to this level is being resisted so strenuously, since the euro traded under the launch rate for the rest of 1999 to near the end of 2003, but traders got the idea in their minds last spring the Euro “should” trade in a range of 1.20 to 1.25 during summer 2005, and sure enough, any forays beyond those boundaries have been short-lived.