Weak Euro, resurgent Dollar
14 May 2010
The Macro Trader’s view:
The Euro has been much in the news over recent weeks, and for all the wrong reasons. The Greek debt crisis which had refused to lie down, even after the EU/EZ/IMF put together a EUR110.0B rescue fund, threatened to engulf the entire Euro zone because traders doubted the problem could be contained.
Looking around the Euro zone several other peripheral states had worrisome public finances, and the Euro zone as a whole had already been warned earlier by the EU commission that without fiscal consolidation, debt to GDP ratios would in a few years hit 100%.
So when the EU/EZ/IMF rescue for Greece was announced traders viewed it as akin to re-organizing the deck chairs on the Titanic while it was sinking. The Euro came under intense selling pressure and stocks collapsed, so the EU/EZ/IMF launched an even bigger rescue fund amounting to US$1.0T. Initial market reactions were positive and the Euro rallied, especially against the Dollar, but the sense of release soon turned once more to anxiety.
As part of the rescue plan, the ECB began buying Eurozone sovereign bonds, as did the Bank of France and Bundesbank. But traders became uncomfortable with this as they judged it was quantum easing without the official announcement.
While quantum easing is a perfectly legitimate response to deflation, in the Euro zone there is no deflation, although CPI inflation is well under target at about1%. The fear then was that the authorities were printing money simply to buy their own debt which could risk a future inflation and the Euro soon weakened.
Switch focus to the US.
The US economy is enjoying what increasingly looks like a V shaped recovery. The two ISM surveys report solid growth. The Pending home sales report recently came in much better than expected and inflation is benign. Add to this last week’s non-farm payroll report which showed the economy created 290,000 new jobs last month and was made to look even better by upward revisions to previous month’s data and the Dollar looks a buy.
And although US Public finances are not exactly a pretty picture, the pace of economic recovery has removed this as a concern for the time being.
So why has the Euro zone suffered so much from anxiety about public finances when other major economies face similar problems?
In a nutshell, the Euro zone is a monetary union without either fiscal or political union. This makes it difficult to correct imbalances as the various sovereign states that make up the Euro zone retain full control over their individual fiscal policy. So while the ECB can set interest rates for the Bloc to control inflation, the member states can loosen fiscal policy to offset this.
Many smaller Euro zone states have clearly been living beyond their means and the markets have called time. While there is now an effort within the Euro zone to try and clear up the fiscal mess, markets will want to see hard evidence that things are improving, until they get it the Euro looks very weak.
The Technical Trader’s view:
Dollar Euro Spot Monthly Bar chart
The market looks to have broken down through the neckline at 1.2723.
If the breakdown is confirmed (Fridays’ close) the impetus for further falls will have been set in motion.
How far? The minimum target about 0.9
To be sure of that move traders will want to be a confirmed break beneath 1.2333
Dollar Euro Spot Daily Bar chart
The rally on the announcement of the Eurozone package could not be sustained.
Watch the close approach to the succession of Prior Lows.
Once through 1.2333 the market will accelerate for the bears.
Stops to be placed at 1.2880
Mark Sturdy
John Lewis
Seven Days Ahead
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