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Mixed Reaction of the USD in the Market

Without any serious news hitting the market today, the USD is currently losing some lustre after its strong run for weeks and it is down against major currencies. The GBP and commodity currencies are the best performers. The relative appeal of the USD seems to have hit a level of saturation in absorbing the pressure from counterparts. Its incredible rally was capped at a 12-day consecutive advance as Tuesday opened lower. The uncertain turn is because the Fed rate hike expected on 14th December is still buoyant. With that said, here are the winners and losers.

Winners

Commodity currencies

The S&P 500 index is up by 0.6%, rising to record high, exceeding the last mid-August peak in response to the strong gains for the energy sector. The oil prices are going up by over 5% as OPEC agreed to cut production at the end of this month. The Iraq’s Oil Minister said that he would put a new suggestion on the table to push for the production cut. The high oil prices have supported commodity prices in general, with the commodity price index for Bloomberg up by 2% on Tuesday.

EUR

The EUR broke its more than 10-days losing streak against the USD, up by 0.2% at 1.0630, although that is subject to change before the trading markets close. Economic analysts are cautious about the European political risk controlling the path of EUR over the next few months, and that could easily make EUR/USD sub parity. Currently, the EUR/USD trades remain unchanged at 1.0630, testing fresh season low posted last minutes under 1.06. Although the resurgence attempt remains minimal in EUR/USD, as the USD wipes-out losses and appear to recover its strength across the major currencies, tracking a slight recovery seen in the European treasury yield won’t be enough. Moreover, the European Central Bank president said that he is ready to employ more stimulus packages whenever required, which is likely to keep prices stable.

There is nothing significance in the EUR calendar today, so the CMC Markets are looking forward to the release of US data for extra incentives. However, in terms of EUR/USD technical levels, the pair finds the abrupt resistance at 1.650, daily high. A break beyond the daily high is expected to test 1.0690 and from there to 1.0700.

GBP

GBP is the best currency performer of the day against the dollar, which is up by 1.1%, going through to 1.25% at some stage. The strong rally caught traders by surprise on, November 22 as many were expecting the USD dollar to dominate the market ahead of the midweek Autumn Statement. The British Prime Minister stole the show with her comments, suggesting that there would be no high point when it comes to Brexit. The economists perceived that she was suggesting that the traditional single-market is more likely to prevail.

So, the much speculation about the strong gains of sterling pound against the USD overnight may be due to the anticipation of a fiscal boost in the UK Autumn Statement or by the statement of May, the UK PM that she will look for a “traditional deal” for the Brexit to evade the “cliff edge” that every business fear. This reaction to the statement of May serves to remind traders how tricky it is to trade with a politically-driven currency. The GBP current resilience, especially against the USD and EUR is going to be tested in the coming days after the fiscal boost.

Losers

The USD/JPY pair rose to high of 111.37 on Monday only to slide and end the day at 110.78. The pair extended the slid to 110.35 on speculation that the dip will increase in the event the earthquake lead to a considerable damage. However, the Japanese government intensified the Tsunami warning, which help the JPY to recover losses and traded largely unchanged on Tuesday around 110.75 levels.

Besides, Trump through a video message said that he will quit the TPP trade deal on his first in office. According Trump, this will help his administration bring jobs to Americans. Remember, this deal was signed by 12 large economy countries, which cover about 40% of the global economy. The remarks may not be received well by the CMC Markets, because it may increase fears of trade wars. If the financial markets in the US and across Europe respond negatively to the remarks of Trump, the JPY is likely to strengthen.

What Exotic Currencies are Saying about the US Dollar

One of the most confounding mysteries currently confronting the forex market is the dramatic drop of the US dollar. Few recent trends have continued for as long, or proved as lucrative, as the enduring fall of the currency since a new low was first reported on in summer 2014.

Forex brokers and traders watched, cautiously, as the EURUSD pairing broke the 2010 low, threatening to hit levels not seen since 2005 at 1.1640. Simultaneously, USDJPY’s 2007 high began to draw attention at the next upside target, at 124.41.

Despite this move higher, traders have remained unwilling to trust in the recovery of the currency, which has not been supported by a firm multi-percentage correlation. As a result, more and more of them are turning to foreign currencies in search of clues as to the future of the US dollar.

The Significance of Exotic Currencies

Although there is a tendency within the forex market to overlook them, exotic currency trends can provide a useful tool in the determination of the true state of the US dollar, helping to uncover whether it’s favoured across the board or only against low-yielding FX.

At the current time, a depressed interest rate environment largely defines the world economy. With interest rates having been lowered around the globe in line with the aims of quantitative easing programs, an assessment of the performance of individual currencies can be distorted. This is where exotic currencies come in useful, as the economies whose interest rates have remained high provide a unique look into the performance of the low-yielding US dollar.

For those with an understanding of the bond market, parallels can be drawn between the role of these exotic currencies and the section of the junk bond faction. The junk bond faction is made up of companies with lower credit ratings than the blue chips that most people are familiar with. The performance information they provide is unique, and can be used to provide a more coherent picture of the market in terms of rebounds in risk and fluctuations in risk sentiment before they become obvious through comparisons with other sections. Similarly, exotic currencies provide a unique insight into the position of the US dollar, and could thus provide an early opportunity to cash in on this.

Recent Events

The US dollar’s recent gain is largely attributable to an announcement made by the Federal Reserve, which claimed that the country was ending its multi-year quantitative easing program. With many other central banks not yet embarked upon or in the midst of their own programs, this saw the dollar gain against low-yielding currencies like the EUR, JPY, CFH and GBP.

This trend was all that certain factions of the market took note of. However, by widening the lens, we see that higher yielding currencies, such as the ZAR, did not respond in the same way.

A second statement by the Federal Reserve, a commitment to ‘patiently’ raise rates over the course of 2015, has also been instrumental in fuelling USD fever. Yet if we look to the story told by exotic currency rates, the tale is very different A Bearish Engulfing Pattern is evident for the USDMXN pair, suggesting that something could be amiss. Indeed, a break below the 17th December figure of 14.37 could catalyse a drop against other higher-yielding currencies such as the AUD, NZD and ZAR, amongst others.

So what does this mean for the forex market and the position of the USD going forwards? With high-yielding currencies showing strength against the former currency, a charge against it could well be in the offing. Indeed, should certain levels fail to provide continued support, a real correction may be on the horizon.

Earn profit and do away with debt – Solid reasons to invest in the forex market

With the increasing debt burden of the Americans, an increasingly large number of them are trying to expand their horizons and branch outside to boost the level of income that they make in a month. As the unemployment level is not showing any positive move, the Americans are suffering from lack of income but spiraling debt obligations that they have to pay in a single month. In case you’re suffering from various debt problems and you’re tired of making the credit card payments, you can switch your role as a forex market investor. Investing in the forex market can assure you maximum returns and you need not take help of the professional debt help companies that may charge you fees for providing you with their services.

What happens when you opt for professional debt relief?

When your high interest credit card debts are rising beyond your control, you should get help from a professional debt relief agency but are you aware of the way in which such companies work and how they help you eliminate your debt burden? If you choose a debt consolidation company, the interest rates on your credit cards will be reduced and you can make a single monthly payment towards the program. However, if you want to make the payments on time, you have to make sure that you keep on making the monthly payments on time. When you’re already in debt, how are you supposed to gather the payments? Here comes the option of starting off with passive income that can be achieved through the forex market. Read on to know the reasons to invest in the forex market.

The solid reasons to invest your dollars in the currency market

Forex offers some advantages that you may not get with the other financial assets. If you’re wondering why you should leverage the forex market when there is the stock market, the bonds and the mutual funds? Here are some reasons.

  • Fewer investment choices: If you’re an investor who is investing money to earn returns with which he can pay back high interest debt, your responsibility is more than a normal investor. When you consult a forex broker, he will give you a choice of 20 currency pairs but when you enter the stock market, you may come across thousands of choices. You may suffer from information overload when you enter any other market and this may make you take wrong decision.
  • Trade with leverage: Trading with leverage is another benefit of the forex market and this type of leverage is much greater than what you get in the other financial assets. While you may get 2:1 leverage in the stock market, you can get 500:1 leverage in the forex market. This means that you’ll be able to control a larger amount with a smaller amount of capital.
  • Trade at any time of the day: Another unique feature of the forex market is that the market is open 24 * 7 and you can trade the market at any point of the day. Even if you go abroad for a vacation, you can trade online at any point of the day and this raises your options of making returns.
  • Size and liquidity: The size of the forex market is a big advantage and this is the largest financial market in the world that trades almost $4 trillion in a day. As a large number of players are involved, the places of the trade gets filled up instantaneously.

Therefore, when you’re worried about your rising debts and you have no option to repay them on time, you may become a forex investor. Earn huge returns and use them for credit card debt repayment so that you don’t have to waste your dollars behind the professional companies.

How to Earn a Quick 4% Yield in 2012

By Sean Hyman, Editor, Currency Cross Trader

I want to introduce you to an opportunity that I’m eyeing for 2012.

It’s a currency play that looks to pay a nice yield of over 4%. That’s about 17 times what a two-year Treasury bond is paying right now.

Even better, this currency play could rise as much as 100% over the next three years.

Now it’s not quite time to get in on this currency play yet, but if you time it right this could be the gem of your portfolio by the end of the 1st or 2nd quarter of 2012.

It’s not easy finding a currency play like this that pays a decent yield and still offers room for capital appreciation. You have to time it just right – that’s why most investors miss out on plays like this.

So consider this your advanced warning to put this currency play on your investment watch list for 2012.

You Have to Wait for the Market
Fire-Sale to Buy

As markets have dropped this year, value is starting to creep back into the markets. Assets have gone on sale recently. But to time this currency play right, you need to wait for most stocks to hit the clearance rack first.

Look at the chart of the Dow Jones Industrial Average below and you’ll see why I say that stocks have begun the process of “going on sale.”

The Dow Broke Its 2-Year Uptrend Five Months Ago


Stocks have begun to correct lower. In fact, they’ve been doing it for about five months now. This new downtrend has further to go. But the good thing about downtrends is that they unfold much more quickly than uptrends.

Uptrends can take years to play out. That’s why you’ll see years of stock market gains – followed by a quick few months that can steal all your stock gains.

That’s pretty typical. Downtrends are brutal and quick. Even one of the longest downturns in modern history (the credit crisis) only forced the Dow lower for a year and a half before turning around.

Well, this correction lower likely won’t have a Lehman-like failure. It won’t likely cause as deep recession as we saw in 2008.

So I don’t expect this downturn to last as long. We’re already five months into this downturn as it is. That means there’s some good news on the horizon for all financial markets.

Stocks will likely find a bottom in the coming months. It could be as soon as the end of the 1st quarter of 2012. When that happens, I’ll be looking to dive into this high-yielding currency play.

I’m talking about the Australian dollar.

Let me be clear – it’s not time to buy this currency yet. But when stocks start to recover, I’ll be looking to dive into this high-yielder (and I’ll make sure all my subscribers do the same.)

The Australian dollar is one of the most stock-market-sensitive currencies out there. You can see that on the chart below. When U.S. stocks recovered, the Aussie dollar recovered. When stocks broke their uptrend the Aussie did the same.

Last time we had a recovery in stocks, the Australian dollar soared. That’s why it’s on my watch list for next year. In fact, let’s look at the last recovery that the Aussie dollar had right along with stocks.

The Australian Dollar ETF Made Almost a 100%
Gain Over the Last Three Years!


If you had bought an Australian dollar ETF at the bottom of the last stock market sell-off, you would have made almost 100% of your money over the next three years while stocks and the Aussie dollar rallied back.

At the same time, you would been earning a fat dividend of over 3%. Today, the dividend yield on this gem is now over 4.3%.

Keep the Aussie Dollar On Your
Watch list for Next Year

So the key is in finding out when will be the next “right time” to buy the Australian dollar ETF. To determine that, let’s look a bit broader than the Dow’s 30 stocks to the S&P’s 500 stocks.

In the coming months, I believe the S&P 500 will work its way back down into the 800s as this whole European debt crisis plays out over time.

It’s not just going to affect MF Global and Jeffries. It’s going to hamper a lot of our big-named banks here in the U.S. that hold a lot of Italian and Spanish debt. As this all unfolds, it’s going to bring these financial stocks lower along with the entire market.

Before all is said and done, I see the S&P 500 falling to the 800 range. As stocks hit this mark, I’ll be looking for stocks to start to make a reversal.

As soon as the timing is right on stocks, it will be time to buy this high-yielding Australian dollar ETF once again.

The present yield on that ETF is around 4.35%. This could drop a bit over the coming months but will still be one of the best yields to be had out there in your stock account.

The key to making serious money over the next decade will be buying at the right times. So make sure to put FXA on your watch list for 2012 – to help you grab some significant gains by 2015.

Have a Nice Day!


Sean Hyman
Editor, Currency Cross Trader

This Simple Currency Strategy Can Save Your Stock Portfolio

By Evaldo Albuquerque, Editor, Exotic FX Alert

When facing a dangerous situation, you usually take measures to protect yourself.

If you were driving in a bad storm, for example, you would probably slow down to avoid an accident. If you’re walking through a rough neighborhood, you would avoid dark alleys. And if you heard there was a shark sighting, you’re likely to stay on the beach and work on your tan.

These are self-preservation instincts we all have to keep us out of harm’s way.

Unfortunately when it comes to the financial markets, most investors don’t use those instincts. When stocks start to crumble, very few take measures to protect themselves.

Not that I blame them.

Even brokers have difficulty telling you what to do when stocks start to fall. All they know how to do is tell you to “buy stocks at the lower price.” So when stocks start to fall, investors feel like they have nowhere to turn.

So most investors end up doing nothing. They simply watch their stocks tumble and hope they will recover somehow.

You don’t have to settle for that. You can take action during those market downturns. There’s a simple way to hedge against losses in your stock portfolio.

It’s a strategy that involves currencies from emerging markets. As surprising as this may seem, you can use these “exotic” currencies to protect your stock portfolio from major losses. Let me explain how exactly this works…

My Favorite Way to Hedge
Against Stock Losses

When you say the words “emerging markets,” most people immediately think of volatility. This also applies to currencies from emerging markets, or “exotic currencies.” They tend to be more volatile than major currencies. But this is actually a good thing.

Emerging market currencies tend to tumble when stocks are falling. In most occasions, they move much faster than stocks.

By shorting these currencies during bad times, you can easily use some of those trading profits to offset the losses in your stock portfolio.

That’s extremely easy to do in the Forex market. You just have to buy the dollar against those currencies. Let me show you how this works with a recent example.

Stocks had one of the best monthly performances ever this past October. But September was a horrible month, mainly because of the European debt crisis. The S&P 500 index dropped by more than 6% during that period. Some emerging market currencies took it on the chin that month.

European exotics, such as the Hungarian forint, were among the worst performing currencies that month. As you can see in the chart below, the currency fell much more than equities.

The key here is that you can use leverage up to 20:1 with those currencies. So you don’t even have to capture that whole movement to score big gains. You could have made triple-digit gains simply by capturing a third of that move.

Shorting Exotics Can Offset Your Stock Losses


Keep This Hedging Strategy in Mind

As you can see, shorting exotics when stocks are falling is a great hedging strategy. It allows you to use some of the short-term gains to offset the losses in your equity portfolio.

In the Forex market, you can use conservative leverage of 20:1, so you can maximize your gains. This allows you to hedge large losses in your stock portfolio with a small movement in the Forex market.

This is a time-proven strategy that’s easy to implement.

In 2008, when the stock market crashed, the dollar rallied against all exotic currencies. In 2010, when the Greek crisis first hit the headlines, the same thing happened. To this date, we see this happening whenever fear takes over the markets.

When stocks go down, the dollar tends to go up against exotics, such as the Mexican peso, the South African rand, and the Polish Zloty.

It’s as simple as that. So make sure next time you think about ways to hedge your stock portfolio, you include shorting exotics in your list of strategies.

Best Regards,


Evaldo Albuquerque
Editor, Exotic FX Alert

What is Binary Options Trading?

binary option trading

When it comes to forex trading, there is a plethora of options available to you. Of these options, binary options trading has become quite popular among investors in recent years, because of the low level of investment needed and the potential to score higher profits is there. As such, this realm of forex trading is particularly useful for novices who are just getting started in this investment practice and want a little more experience and knowledge building before dumping larger amounts of your money into forex accounts.

Unlike traditional models of investing, such as purchasing stocks or bonds, binary options are contracts in which your income relies on the direction of the given asset within a certain time frame. This is known as a less-risky option in forex trading, as you, the investor, get the same set income regardless of how much the value rises in the contract. The only thing that matters in binary options forex trading is that you were correct in your predictions.

To simplify matters even more, there are just two options in binary forex trading that you need to be concerned about: put options and call options. A put option is an investment made when you believe the price of the contract will be below the original price upon expiration. Meanwhile, a call option is the exact opposite, with you expecting the overall price to rise above the original value upon the expiration date.

This can easily be applied to forex trading. For example, if economic indicators are looking bad for the European Union, you could purchase a put option on a Euros contract, with the expectation of the currency’s value to drop by the time your contract is up. Likewise, if the value of the US dollar looks like it could be rising in the near future, the best way to capitalize on this while minimizing personal risk would be to purchase a call option on the USD and profit when the value does in fact, go up. Your leverage would not be as high as, say, a traditional forex trader relying on the currency’s consistent value and no set asset ceiling to be gained (or lost). However, binary options are essentially one of the safest bets you can make as a forex trader.

In a highly volatile market such as forex trading, it’s quite beneficial for newer or small-time investors to have the binary options available in order to minimize the risk on their investments. This allows them to learn the ropes of forex market practices and learn to read forex trading signals without suffering heavy losses along the way. It has all of the same currency pair mechanisms of traditional forex trading, but with smaller caps and less risk factor.

This article was written by Will from Forex Trading Finder. Visit Forex Trading Finder for more information on Binary Options Trading.

Successful Forex Trading Is NOT about Being a Genius

by Jack Crooks

Jack Crooks

During my currency trading career, three books have had a profound influence on me by dispelling several common beliefs. And perhaps they can help you too.

The first was …

The Way of the Dollar,
by John Percival

With this introduction, Mr. Percival made a key point that struck me:

“Finally one had to see if there were other relationships which had any predictive value for currencies — like inflation, trade, money supply, oil prices, economic growth, et al.

“So far, the conclusion is that few such relationships — and none of the relationships that most observers seem to rely on — are useful for predicting the dollar.”

It took a while for Mr. Percival’s early lesson to sink in. In fact I still make the mistake of looking for factors where none really exist. I think this is an area where many other investors make the same mistake. I often receive e-mails telling me the dollar can never rally or things can’t happen because of A-B-C … the relationship is “perfectly clear.”

The favorite rationale I hear most is about debt. Granted debt is a serious problem and not one to be taken lightly by any means. When it comes to currencies, though, over time there is very little correlation between debt and the movement in the dollar, or many other currencies for that matter.

But it seems people latch on to ideas they cannot let go of. And the degree to which they cling to these beliefs in financial markets is unusually strong.

Just look at the debt profile of Japan. The yen has gone up and down a lot during a period when debt levels as a percentage of GDP have consistently soared!

Next is the best book ever written about global macro investing …

Alchemy of Finance,
by George Soros

Who better to learn from than the single best global macro trader ever?

In this brilliant treatise on the subject, Soros said strange things, such as:

“There is no such thing as ‘equilibrium.'”

“Asset markets are nothing more than “boom-bust cycles.”

“Prices are fractal in nature.”

Then in Soros’ book I stumbled across the name Karl Popper, a German philosopher, who wrote …

Problem of Induction

Induction’s application in the financial world is best known as “back testing.” This is what you get when you assume that what happens in the past will happen in the future. Such an assumption can be deadly dangerous to a trading account.

Reading Popper gives a deeper understanding of why we cling to beliefs so tightly and assume we can confidently project our expectations into the future and be confident we will be right.

Sometimes I’m asked: “Why are you so confident that x, y, or z will happen?”

I am never fully confident, although in a high enough degree to pull the trigger. So I provide some rationales, knowing that the market can prove them wrong at any instant. Reading Popper should come with a warning label, as he will do that to you.

Popper asked the following psychological question: Why do we all have expectations, and why do we hold on to them with such great confidence, or such strong belief?

He posed that we must use experience of past instances to advance our knowledge. But we must accept the fact that just because so many past instances were effectively consistent, or the same, it doesn’t mean a theory based upon those past instances has been proven.

The reason he says this is because there may be some future instance out there that invalidates all that has come before it, and it only takes one such instance to do that. Therefore, all theories can be falsified, but they cannot be proven simply by past experience.

Examples: Everyone knew AAA-rated securities were safe. Everyone knows municipal bonds will be fine because the default rate has always been low in the past. Everyone knows that gold is the only real money. Everyone knows inflation is a monetary phenomenon. Everyone knows the dollar must go down. Everyone knows that China will rule the world soon.

We could go on and on with what everyone thinks they know. But interestingly, the things we seem to think we know often don’t even have the consistent instances of induction in their favor!

We cling to ideas in the financial world that have been falsified before but seem to gather a second life. This isn’t even close to the word logical.

I think this is why the kernels in financial markets seem to be centered on the understanding that markets are driven by irrational expectations; therefore sentiment is where one should maintain focus.

Now back to Percival, again from his introduction to The Way of the Dollar:

Because the system’s constituent parts are mostly based on human behavior which doesn’t change, we can be confident it will continue to work.

The financial markets, as anyone familiar with them knows, have a logic of their own, which is in a way the opposite of normal logic. Hence the market adage ‘sell on the news’ applies to good news not bad news. Hence other bits of market lore like ‘a bull market climbs a wall of worry: A bear market flows down a river of hope.’

Markets do whatever they need to do to confound the greatest number of people.

This happens because prices reflect expectations. If everyone expects unemployment to rise, or a trade balance to fall, or inflation to remain steady, there is no intrinsic reason why they should be wrong: The expectation doesn’t affect the outcome.

But if everyone expects shares to fall, or the dollar to rise, there is every reason why they should be wrong: Because current share price levels already reflect the expectations of lower prices, and the current level of the dollar already discounts a rise.

In other words, the expectation cancels the outcome.

You can see why Mr. John Percival is an excellent mentor. One more interesting thing Mr. Percival wrote in his book, which he later said he wished he left out was this:

“Active traders have little to lose and much to gain by observing the following maxim: Distrust price action ahead of a full moon, trust the action after it.

“Rationalize it as you please: The impression is that market action tends to be primitive, dim, and emotional before full moons, and more collected and rational after them; and that there is sometimes a periodicity in currency fluctuations which can be almost as reliable as the tide!”

Loony sounding I know, but there is a key point we shouldn’t miss here …

Successful trading is not about being a genius, but about constantly exploiting ‘the little edge.’

In short, we all can and should have reasons and rationales in our mind about why we have taken our positions. We need that confidence to push us over the edge so we can take a position in the first place, i.e. pull the trigger.

But we must understand that our beliefs can be destroyed by the market at any moment. And that moment usually happens when we too fervently argue said beliefs.

Best wishes,

Jack

Source: Money and Markets

Fiddling While the Euro Burns

By: John Browne
Senior Market Strategist, Euro Pacific Capital, Inc.

Last week, eurozone finance ministers postponed, yet again, the most difficult decisions on the Greek debt crisis. The assembled powers could have forced an orderly Greek default or they could have taken steps to push Greece out of the union. Instead, they simply bought time until the next major rollover of Greek debt – which comes due in November. I don’t expect much to come from the brief respite.

Much of the prevarication can be attributed to political disagreement in Germany, where some see the current crisis not only as a means to further European unification, but also as an opportunity to extend German influence throughout the continent. Other Germans, particularly those in the south, see the crisis as a means to roll back the flawed structure of the eurozone. The resulting indecision is allowing adverse sentiment to set a time-bomb under the euro.

In truth, recovery has no chance of taking hold without a clear idea of what Europe may look like politically in a few years. Today, there is a desperate need for a momentous decision by Germany.

Rest assured these are problems that can’t be swept under the rug. Greece now has a debt-to-GDP ratio of 173 percent. Simply put, it is hopelessly bankrupt. The ‘troika’ of the EU, ESM, and IMF are demanding that Greece accept more austerity in return for more funding. But, already, austerity is reducing Greek GDP and tax revenues while creating civil unrest and a greater demand for social security payments.

The austerity medicine in Greece is also creating similar problems for Italy and Spain, whose economies are much, much larger. Spain has twice the outstanding debt of Greece, Ireland, and Portugal combined. Italy has five times that amount. The sums needed to rescue Spain or Italy would stretch even Germany to the limit of solvency.

Already, the euro is falling fast even against the deeply flawed US dollar. As I see it, there are three possible conclusions to the crisis:

1. The euro splits into two parts: one for the cash-generating northern countries and one for the Mediterranean countries, possibly including France. This two-tiered system would take into account the differences in economic reality for the two regions and would provide much more financial flexibility.

2. Some of the Club Med countries are forced to leave the euro, re-issue their own currencies, and attempt to generate earnings to repay debt.

3. The euro ceases to exist. As the world’s second currency, this would result in a short-term stampede into other fiat currencies such as the yen, Swiss franc, Norwegian krone, Australian and Canadian dollars, even sterling, but predominately into the US dollar.

Any one of these outcomes is preferable to the unsustainable status quo. But an orderly Greek default combined with an exit from the euro would be the best strategy to move forward. Unfortunately, this option is unpalatable to internationalist politicians, who want to maintain the pan-European government, and the banking system, which is choking on bad sovereign debt. Still, talk is growing.

If a default does come, the big question is how much creditors could lose through debt haircuts. Recently it has become clear that the 21 percent haircuts for private holders of Greek debt, which had been agreed on in July, may have to be deepened to 40 or even 50 percent. However, calculations will need to me made as to how much losses can be accepted by the banks before their insolvency threatens the solvency of their own nations. Very few observers know for sure how much bad debt lurks on the balance sheets of the big European banks. This question alone threatens further and more dramatic contagion.

Eurozone governments, in particular Germany, France, and Belgium, have long ‘persuaded’ their banks to load up on PIIGS sovereign debt. Now, unsurprisingly, a PIIGS default threatens German, French, and Belgian banks. France has some of the largest banks, all carrying unknown amounts of these toxic assets. BNP, Credit Agricol, and Societé Géneral alone have combined assets (of all sorts) of some $7 trillion. This staggering sum is equal to about half the US Treasury’s massive debt. However, the French economy is less than one fifth the size of the US economy. If losses related to bad sovereign debt were to push any of these banks into default, the ramifications could be dire for France.

The world’s immediate economic future rests with a prompt decision by Germany to abandon its dreams of empire and cut off funding for the PIIGS. Such a move would protect Germans from unlimited bailout requests, save the people of the PIIGS from unnecessarily harsh austerity measures, and provide a needed reprieve for the euro and international fiat currencies. For an even more in depth look at the prospects of international currencies, download Peter Schiff and Axel Merk’s Five Favorite Currencies for the Next Five Years.