Bubble - something that is going to blow

At the British bank HSBC, currency strategists have said once again that they are calling for an end to the US dollar’s stifling rally. The strategists have now related the US dollars sharp rise that began in May to the pattern that is shown in classic asset price bubbles.

DEFINITION of 'Bubble'

1. An economic cycle characterized by rapid expansion followed by a contraction.

2. A surge in equity prices, often more than warranted by the fundamentals and usually in a particular sector, followed by a drastic drop in prices as a massive selloff occurs.

3. A theory that security prices rise above their true value and will continue to do so until prices go into freefall and the bubble bursts.

Read more: http://www.investopedia.com/terms/b/bubble.asp#ixzz3XHCC0Md4

In March, the strategists that are led by David Bloom said that the rally is in fact nearing its end and that the British bank has managed to raise their Euro forecast. The HSBC is now the first major bank that has now predicted a growing Euro by the end of next year. Currently they now see the EURUSD at 0.24% and the EURUSD is expected to rise to $1.10 by the end of next year and by the end of 2017 the EURUSD will be at $1.20.

Goldman Sachs though has a different view and forecast that the Euro will hit par by September but then fall by 80cents by the end of 2017.

David Bloom of HSBC went on to say that the EURUSD rally may have more room to keep going.

However, they elaborated on their call by creating a parallel between the ICE dollar indexes with a gain of more than 25% since May 2014 and classic bubbles like the tulip mania that absorbed Holland during the 17th century and the South Sea Bubble that came into existence in 1720.

HSBC went on to say that it shows an important move and major rallies like this have life cycles that are similar to one another and follow typical phases.

HSBC researchers have divided the typical asset price bubbles into four phases and say that the dollar is currently in phase 3.

Here is a look at these 4 phases.

New discovery – First Phase

The cycle begins with a new discovery and in the case of the dollar the first phase was the start of the currency war. This currency war was where countries wanted to decrease the value of their own currencies in order to gain a competitive edge during the financial crisis. The US created the greenback to grown during their recovery.

Early Rise – Second Phase

During the early rise, which is the second phase, investors saw that an important change was about to come around. They would then get in early so that they could make a healthy gain that then contributed to a further rise.

Regarding the current rally the Europeans Central Banks persuasiveness in the lead up to the launch calculable easing and the Fed’s narrowing contributed to the justifiable adjustment in exchange rates, which then affected the EURUSD.

Rally Picks Up – Third Phase

The pace of the rally picks up during phase three and is essence it becomes divorced from reality in the idea of that this time it is different and the potential to lead to a final surge higher.

This means that currently participants are buying the dollar because they think that the rally will continue. The Europeans Central Banks easing program is known for its terms of scale and duration. The Fed rate hike has also been anticipated according to HSBC strategists.

The Fall – Fourth Phase

The last phase of the bubbles is the fall. Once a rally has finished any small change can result in a reversal. Generally the fall will just happen with little time to combat it. Prices will then only stabilise after submission is complete.

In regards to the dollar there might be a temporary and final motion higher which will then push the euro towards equality is possible, but this will mean that the US currency will be overexerted instead of having an up surge.

HSBC then warns that as it is nearly over that you should get out whilst you can. In essence, the EURUSD is on the rise, but for how long will the dollar rise until it begins to fall and eventually equalise with the euro.

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The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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