Tag Archives: Eurozone

The Euro Could Fall all the Way to 90 Cents

european union stars

By Evaldo Albuquerque, Editor, Exotic FX Alert and Currency Capitalist

Europe’s woes will not be banished – and this week, just when you thought it was safe, things got even worse.

Spain announced its 2011 deficit will be much deeper than anyone thought – and that means it will almost certainly need a bailout, sooner or later.

Borrowing costs for countries like Italy and Spain are still skyrocketing, which makes it harder for them to roll over their debt.

Meanwhile, trading in UniCredit, Italy’s largest bank, was suspended after shares tumbled in response to a heavily-discounted share offering. This indicates the bank is having trouble raising capital, making it a strong candidate for another European bank failure.

How Low Can it Go?

There’s no question that all this is bad for the euro.

But how low can it go?

We don’t have a crystal ball, but we have the next best thing – chart patterns.

One of the most reliable chart patterns, known as Head & Shoulders, is now saying the euro could drop all the way to $0.90.

If you’re not familiar with this pattern, you can read this article I wrote last year explaining how it works.

In that article, I also showed how this pattern could have saved your portfolio from the 2008 stock market crash.

It’s basically a pattern that indicates that an asset will move lower, much lower.

Let’s take a look at the big picture for the euro. Below is a monthly chart that goes back to 2001, when the euro started a major bull market. Notice there’s a massive potential Head & Shoulders forming right now.


I say “potential” because this pattern is only complete if the price closes below the black line, known as neckline.

Right now, that line is at 1.24, so the euro is still trading above it – but not by much. It’s trading around 1.27 today.

One of the great things about this pattern is that once it’s complete the price usually falls by the same distance that separates the top of the head and the neckline. So you can use that distance to project a minimum target.

The target in this case would be around $0.90, which is much lower than anyone expects the euro to go.

But can the euro really close below 1.24?

Well, another Head & Shoulders pattern, this time on the weekly chart going back to 2010, shows it will certainly happen.

Notice that the price has already closed below the neckline. Using the distance between the top of the head and the neckline, you get a minimum price target of 1.22.


The Fed Will Keep the Dollar Weak

My observation about the Head & Shoulders is not a prediction. It’s just, well, an observation.

I rarely disagree with the pattern because it’s very reliable. But I find it hard to believe the euro will move all the way to $0.90. Why? Because of the Fed.

If the euro drops that much, it will mean the dollar will be much stronger – and the Fed won’t allow that to happen.

It wants a weak dollar to boost the U.S. economy through exports.

Besides, if the euro drops much lower, Europe will very likely be in a very deep recession.

The euro zone accounts for about 16% of the world economy. If we get a deep recession over there, it’s unlikely the U.S. will be immune.

If a recession spreads from Europe to the U.S., the Fed will have a good excuse to start printing money again, driving the dollar lower.

Nonetheless, the Head & Shoulders pattern indicates the major trend of the euro remains down, and it could move all the way to 1.22 in the weeks ahead.

Profiting from the Smaller Currencies

And if it closes below 1.24 on the monthly chart, we will have strong evidence the euro zone is falling apart, and the euro will move much lower.

It also shows that, if the euro fails to close below 1.24 on a monthly chart, it could have a big rally, much like it did in 2009 and 2010.

There will be a lot of demand for the euro around 1.22-1.24. So my instinct is that will be a great level to buy the euro for a short-term trade.

But for now, any euro rally is a shorting opportunity. I will be betting against the euro by shorting smaller European currencies, such as the Czech koruna and the Polish Zloty.

Very few people believe the euro will move all the way to parity. I don’t know anyone who believes the euro will move below it.

But the Head & Shoulders says the euro’s downside risk is much larger than anyone thinks, and it could still move all the way to $0.90.

Best Regards,


Evaldo Albuquerque
Editor, Exotic FX Alert and Currency Capitalist

Eurozone collapse ‘starts this year’ says CEBR

european union stars

Europe’s single currency is almost certain to disintegrate within the next decade, the CEBR has predicted, with Greece and Italy potentially abandoning the euro this year…or so this article says (The Telegraph).

I sincerely hope this does not happen, but we as currency traders must be prepared for this event. Are you ready for a massive euro shorting storm?

Out of curiosity, who is long on the Euro at this point?

Alan

The Light Bulb Moment for the Eurozone

EWI’s free EU debt report sheds some light on what’s in store

By Elliott Wave International

How many European bankers does it take to change a light bulb? That’s a joke in search of an answer, but EWI’s European analyst Brian Whitmer explained five months ago that the “light bulb moment” was coming — that’s the time when most people would clearly recognize the severity of the European debt crisis. He offered this spot-on analysis back in July 2011, before the larger world came to know recently how bad things really are in the eurozone.

This chart shows how markets in Greece, Ireland and Portugal have behaved over the past five years, including the bailouts. Whitmer says that the turmoil in Greece is due mostly to both social mood and Greek markets having plummeted for more than a year and a half, while the larger EU stock markets have levitated. Once they turn down, he forecasts that what you saw in Greece will be replayed in the eurozone.

To help his subscribers see the light and get the full picture, he compared EU member nations under financial scrutiny to those that are usually viewed as being safe — and showed that they weren’t as safe as most people thought.

Specifically, Whitmer warned that the debt per person in Greece looked eerily similar to the debt per person in highly regarded countries, such as Germany and France — and even to non-eurozone countries, such as the United Kingdom.

In 2010, Britain proposed a five-year, 25% budget reduction that affects nearly every area of the government. While it sounds like a drastic measure, it has played out differently during the past year. According to member of European Parliament Daniel Hannan, statistics show that not only is government spending and borrowing significantly higher than this time last year, but taxes, too, are way up. Whitmer notes that the budget cuts rely heavily on the future and lack near-term bite.

Why has the worst of Europe’s violence taken place on the streets of Athens rather than London? Athenians did not suddenly grow more violent in 2011. What has changed since 2007 is their stock market. Whitmer’s words of advice: “…should your country’s stock market begin to look like Greece’s, watch out. Trouble will be on the way.”

*****

European Financial Forecast Editor Brian Whitmer has covered Europe’s debt crisis since March 2010 — and his forecasts kept subscribers ahead of the downward spiral every step of the way. Read more of his analysis in our free report, “The European Debt Crisis and Your Investments.”

View your free report.


Free Report
The European Debt Crisis and Your Investments
Continue reading more articles like this one by Brian Whitmer in our European Debt Crisis report. This free report offers commentary from February 2010 through November 2011 that will help you to better understand what could be in store in the coming months and years.

Download your free report now.

This article was syndicated by Elliott Wave International and was originally published under the headline The Light Bulb Moment for the Eurozone. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Short this Currency Now

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Back then, it took several billion to buy a loaf of bread. Another couple billion to purchase eggs, fabrics, sugar – basically anything you needed.

The price of everything was doubling almost every single day. Workers were paid three times a day to keep up with rising prices.

Inflation was rising by 29,500%…each month.

This was the reality in Germany, 1923. This traumatic event has gone down in history as one of the worst cases of hyperinflation ever. It also made the Germans almost paranoid about fighting inflation ever since.

No wonder the recent spike in commodity prices is already making Germans a little nervous.

And that has important consequences for the currency market. Monetary authorities in Europe are getting ready to fight inflation. For those of us who are ready, it will mean some killer opportunities in certain currencies.

An Economy Running on All Cylinders

The present-day Germany is booming. That’s the good news. The bad news is inflation is also on the rise.

Inflation measured by the Consumer Price Index is already higher than the European central bankers would like. It’s already above the European Central Bank (ECB) target. And official data actually underestimates the problem.

Unicredit Bank, one of the major banks in Europe, adjusted the official inflation by giving more weights to goods people buy most often, such as fuel, food and clothing.

This methodology makes perfect sense. It’s more likely to reflect the true level of inflation. The bad news is they concluded prices in Germany are rising almost twice as fast as the official rate.

Last month, the employment situation improved three times faster than the market expected. The unemployment rate is now reaching a two decade low.

German unions are already pushing for bigger wage increases. The country’s IG Metall union, for example, has asked for a 6% increase for workers at companies such as Volkswagen.

This demand for higher wages really scares the ECB. And the rising commodity prices don’t make things any easier for the central bank.

History is Likely to Repeat Itself

We’ve seen this before. So we can visualize how things will play out.

In 2008, there was a major rally in commodities, with oil spiking all the way to $140. At that time, the euro also surged on expectation of higher interest rates.

Higher oil prices increased the fear of inflation, forcing the ECB to hike rates in July. As you can see in the chart, it didn’t take too long for the euro to tumble.

Last Time ECB Hiked Rates, the Euro Took a Big Dive

Shortly after raising rates, the financial crisis escalated, forcing the ECB to cut rates to a record low. History may be about to repeat itself.

If commodities keep rising, the threat of inflation will escalate in Germany. The ECB may just make the same mistake it did in 2008, hiking rates at the wrong time.

While in 2008 the global financial crisis was behind the euro decline, this time I suspect internal imbalances will do the job.

Who Cares About the PIGS?

With prices of commodities skyrocketing, the inflationary pressures will only get worse.

That’s why the European Central Bank has already signaled it will raise interest rates if inflation fears escalate. And that’s what has been driving the euro higher recently.

Higher interest rates would be very appropriate for a booming Germany economy. But it’s certainly not appropriate for nations that are slumped in recession, such as Greece.

While employment in Germany keeps improving, the unemployment rate in countries like Greece and Spain has more than doubled in recent years.

But for the European Central Bank, it doesn’t really matter. They will always do whatever is best for Germany.

Higher rates will make the life of the PIGS (Portugal, Ireland, Greece, and Spain) a whole lot more complicated.

With austerity measures still biting, higher interest rates is the last thing those countries need. It may just send them into a very nasty deflationary environment.

Saving Germany Will Hurt the PIGS, and the Euro

That’s the problem when you have to use the same monetary policy to countries in very different situations.

It’s like giving the same insulin shot to two different patients, one diabetic and one healthy. The injection will do wonders for the diabetic, but it may just kill the otherwise healthy person.

So the European Central Bank has to decide between fighting inflation in Germany and saving the troubled nations. With rising commodity prices, a booming German economy, and the ECB’s natural inflation phobia, the Central Bank will most likely pick the first option.

That just confirms my view that the euro is going to fall from here. Be on the lookout for shorting opportunities.

Bottom line: Although higher rates will push the euro higher in the short-term, in the long-term, it will come back to bite the troubled nations. Stay short the euro!

Best Regards,


Evaldo Albuquerque
Editor, Exotic FX Alert
http://evaldo.worldcurrencywatch.com/

Why March 25th Will Seal the Euro’s Fate

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By Evaldo Albuquerque, editor, Exotic FX Alert

Imagine getting a letter from your bank saying your mortgage bills will double starting next month.

If you were paying $1,200 a month, you’re now responsible for a $2,400 payment. And there’s nothing you can do about it.

It’s not far-fetched. It already happened to thousands of Americans, just a few years ago.

During the real estate boom, adjustable-rate loan companies suckered in Americans with their very low teaser rates.

House prices back then were so high that many people could only afford to buy a home with this kind of loan. The initial low rates made the monthly payments very affordable.

But things got very ugly once those loans reset to higher rates. Mortgages bills skyrocketed, and forced many Americans to give up their homes through foreclosure.

Now, something very similar is happening in Europe. But it’s not happening in the housing sector.

This time, governments are the ones facing skyrocketing interest payments. And there’s one more EU country that’s doomed to face a “rate reset.”

When it does, it will send the euro spiraling even lower. Let me explain…

Why 7 Is the Point of No Return for the EU

Recent events have proven that the European troubled nations (affectionately known as the “PIIGS”) can’t handle interest rates above 7%.

What that means is, these nations can’t afford to pay bond rates above 7%. When the yields on 10-year sovereign bonds cross that level, it’s nearly certain that a country will ask for a bailout.

In other words, when bond rates hit 7%, these countries cry “uncle!”

That number has already exposed the true extent of Greece’s and Ireland’s problems. Once Greece’s debt holders started demanding an interest rate above 7%, it took Greece 16 days to ask for a bailout. Ireland requested a bailout 20 days after Irish debt hit the magic 7% level.

Those countries just couldn’t afford such high borrowing costs. It’s just like what happened during the U.S. real estate crisis – only on a grander scale. Eventually, the mortgages rise to a rate that Americans simply can’t afford to pay – and they foreclose.

Well in sovereign debt, nations ask for a bailout once their debt hits 7% rather than “foreclose.”

And now, the dreaded 7% interest rate is about to make another victim: Portugal.

It has just breached that important threshold. Check out the chart below. It shows the yield on 10 years bonds from troubled European nations.

Portugal Can’t Afford Such High Borrowing Costs

Portugal: The Next Shoe to Drop

Portugal’s borrowing cost is approaching dangerous levels. Some European Union member states are increasingly concerned about Portugal’s ability to fund itself in financial markets. With interest rates on the rise, Portugal is not going to be able to hold on beyond the end of March.

Meanwhile, investors are demanding a higher interest payment on Portugal’s bonds because of uncertainty regarding the rescue fund.

European authorities promised to announce a comprehensive plan to solve the debt crisis by March. But there are a lot of disagreements between Germany and troubled nations, such as Greece and Italy.

Germany is proposing tougher austerity measures in exchange for beefing up the rescue fund. But Greece and Italy have already rejected Germany’s proposal.

So there’s a good chance European authorities won’t keep their promise of delivering a final solution by the end of next month. When that happens, Portugal will be in trouble.

Mark This Date on Your Calendar

Athanasios Orphanides, one of the European Central Bank members, has recently warned that without a comprehensive plan, European nations might slip back into crisis.

In his opinion, the longer political leaders “delay in agreeing on a framework that will ensure stability, the greater the threat of another crisis similar to what happened in 2010.”

All the European Union nations will be meeting at a summit at the end of next month. March 25 is the informal deadline for the leaders to announce a comprehensive package of measures to address the sovereign debt crisis in Europe. If they fail to announce anything significant, the market will get very upset.

Orphanides’ fears will become reality, and the euro will take a dive. So make sure you mark this date on your calendar.

In the meantime, I’m shorting the euro with everything I’ve got. I recommend you do the same.

Best Regards,


Evaldo Albuquerque
Editor, Exotic FX Alert
http://evaldo.worldcurrencywatch.com/

Why is the Euro Going Down

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When Western nations such as Australia and the US see their economies recovering and their job cuts slowing, it is easy for forget that many countries are still struggling with the effects of the Global Financial Crisis, several years on. For example, the Euro has seen some significant losses against the US dollar and this is due only in part to the Greek crisis.

Rather, this could be just the beginning of the collapse of the Euro all together if precise action is not taken, since a number of other member countries such as Spain are also struggling with high debt levels. As the Euro struggles to recover, that recovery is made even more difficult due to the lack of investor confidence – while the US Federal Reserve has been long established, the Euro is relatively new to the market and doesn’t offer the predictability or instill the trust of the Fed.

Plus, the Euro is going down in relation to the US dollar which is seeing increased demand thanks to European companies investing in the US dollar to get better value from their investments. US companies are also pulling out of foreign investments to secure their capital base at home and this shows a rise in the dollar value, when compared to the Euro.

The Euro in 2010

The European currency is constructed with a common central bank, but no common treasury and with a fixed exchange rate, a country is not able to depreciate their currency. Also, in the US, American states can benefit from transfer payments if they are worse off than other states, but that practice is not seen in Europe. As a result, the Euro has been severely tested and the Greek crisis has put the currency on its longest losing streak against the dollar since November 2008.

Even though it is predicted that Greece will survive its fiscal crisis, there are concerning budget deficits in other Euro-region countries such as Spain. Other countries facing similar difficulties to Greece could force the Euro to fail if institutional measures are not taken. The European finance ministers pledge to safeguard the financial stability of the Euro as a whole, but the currency may still disintegrate if the next step towards political union is not taken.

Options for EU Countries

EU countries are especially weak thanks to a single monetary policy, yet maintaining different fiscal policies. Despite this, the EU leaders have promised action to help Greece control its budget deficit, which could involve other EU countries selling their Eurobonds. This would allow Greece to refinance around 75% of its maturing debt and meet its targets, and the rest of the country’s needs can be met internally. Higher value added taxes are also being considered on luxury goods and energy products, and if enough progress isn’t seen from these measures, Greece will have to cut its capital spending.

Euro-area officials are also considering a plan to grant Greece approximately 25 billion Euros if required, and the funds may be coming from state-owned lenders such as Germany’s KfW Group. A tax on financial transactions may also be imposed to deter speculation on currency trading.

Why is the Euro Down?

Investors the world over know that Greece is in financial trouble and many are pulling their money from Greek markets, while European Union officials aim to instil confidence in investors. It is the investors who are pulling out who are creating the financial instability which has caused them to pull out in the first place.

While this vicious cycle is part of the reason the value of the Euro is down, investors are also selling up because they believe Greece is broke. As a result, it is a natural instinct to withdraw funds from a government which is in debt, and can’t handle its own finances, let alone your investments. It was in fact the Greek government’s irresponsible spending which lead to their current situation, where they continued to spend more than they made, and saw their debt levels reach approximately 94% of their GDP. It was at this point that investors wanted their money back.

At the same time, the fiscal policy of the US has raised their debt to 87% of their GDP and if current trends continue that rate is expected to be 95% by the end of 2010 and 105% by the beginning of 2011.

Solutions to the Falling Euro

In December 2010 the proposals to increase the bailout fund found a voice when the Belgian finance minster Didier Reynders backed the move as a chair on the EU’s economic affairs council. However, the German chancellor Angela Merkel does not see any need to increase the rescue fund which is already at 440 billion Euro. Merkel has also dismissed the creation of a Europe-wide bond on the basis that the bloc treaties do not allow for the creation of such a bond.

However, the rules which govern the operation of the rescue fund mean that the Eurozone is unable to lend the entire 440 billion Euro amount and if Spain and Portugal needed rescue funds, greater lending capacity would be required. At the same time, a Europe wide bond was rejected as a the solution to the Greek crisis in May 2010 on economic and legal grounds.

Instead, a more comprehensive solution is needed to effectively stabilize Spain and Portugal, and in turn strengthen the Euro. Where one European country after another is treated in the crisis does not offer a viable solution.

Currently, mass purchases of bonds by the European Central Bank have decreased borrowing costs for Spain and Portugal, who cannot expect the same bailout assistance offered to Greece and Ireland. Instead, a proposed Italy-Luxembourg plan was put forth to create a European bond which would allow the struggling countries to borrow at lower rates. However, the German finance minister is opposed to this plan, saying that as the interest rate risk is distributed to all Eurozone countries, it would not meet the EU budgeting rules.

The Irish government is working to regain control of its economy and presented its austerity budget plan to parliament which aims to cut 6 billion Euros of spending in 2011 and 15 billion Euro in the following four years. Ireland also maintained low corporate rates, despite opposition from France and Germany during the bailout.

The Future of the Euro

Despite plans, talks and proposals, the fate of the Euro still looks to be in doubt, with nearly $8 billion from traders and hedge funds being bet against the Euro, which is the biggest short position in the single currency since its launch. The build up of the net short positions is made up of more than 40,000 contracts traded against the Euro and shows investors are not confident that other European countries can manage their fiscal problems after the Greek crisis.

As a result, foreign business is likely to be much more wary about investing in the Eurozone and will require significant hedging of the currency. However, as the hedges are harder to get, foreign investments could cease all together, adding to the Euro’s problems.

The future of the Euro will be determined by the likelihood of a wave of sovereign defaults and what the Eurozone is willing to do to prevent these. For the Euro to survive a sovereign debt restructuring, a significant restructuring of the public and private debt in the struggling countries is needed. It is quite likely that there will be a wave of sovereign defaults because there is always an inherent danger in lending to sovereigns as they lack collateral. As a result, the security of their creditors is dependent on them being able to sell their debt to others for a good return.

The confidence of the creditors comes from the sustainability of the economy in relation to the prospective growth, and the interest rate. if growth is low, and interest rates are high, a larger surplus is required and the greater these costs are, the less confident investors will be. With rising ratios of debt to GDP, high interest rates and poor growth outlooks, options are not attractive to investors.

Since the funds on offer at the moment are not enough to finance all of the weak countries, the Eurozone will need to make changes to prevent future defaults. As a result, the restructuring of sovereign debts could trigger a wave of debt restructuring and see another tangent of the Global Financial Crisis. What is needed are transfers from the credit worthy to stabilize the un-creditworthy and the more swiftly that happens, the more likely it is that the Euro will return to normal sooner.

Alban is a personal finance writer at Home Loan Finder, a home loan comparison website.

The Euro Game is Up

Hi everyone. Here is an interesting video I came across on David MacGregor’s blog (from Global Freedom Strategies) that is related to the Euro. In this video you’ll get to listen to a very feisty talk on the future of the EU project by UKIP (UK Independence Party) EU representative Nigel Farage:

[youtube Fyq7WRr_GPg]

Enjoy!

Oh and if you have any comments or you’d like to discuss this issue in a forum environment I’d like to invite you to the Forex Nirvana forum where I hang out:

http://www.forexnirvana.com

Cheers,

Alan