Tag Archives: the euro

Why March 25th Will Seal the Euro’s Fate


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

The Falling Euro May Offer the Best Investment Opportunity in 2011

Bryan Rich

As we start the New Year, the global investment climate looks remarkably similar to this time last year. The world is getting more bullish on the outlook for the U.S. Meanwhile, the unfolding sovereign debt crisis in Europe threatens to squash global risk appetite and send not only Europe back into recession, but perhaps trigger another global financial crisis.

When the global financial crisis erupted in 2008, it exposed the structural flaws of the European Monetary Union (EMU), the then 9-year old concept of monetary unity between sixteen European members. Since then, the crisis in Europe has only worsened.

European officials tried to sweep this crisis under the rug. They denied its severity and then made shocking, empty promises that they were willing to absorb the damage at any cost.

Now the question is:

Will 2011 Be the Year
the Euro Collapses?

The challenges ahead for the euro zone suggest that it will.

The euro offers risk and opportunities.
The euro offers risk and opportunities.

Investors may think a euro collapse is strictly a risk to their investments. But the fallout in Europe could also offer the biggest investment opportunity in 2011. Either way, the events as they unfold command attention and respect.

Nearly $1 trillion of sovereign debt needs to be refinanced this year in Europe. And nearly $1 trillion of European bank debt needs to be refinanced in the next two years. All will require much higher interest rates than were enjoyed last year this time — every euro of the €750 billion European Financial Stability Mechanism (EFSM) could be called on.

But we’ll likely find that this mass-scale rescue plan offered by Europe and the IMF in the middle of 2010 was nothing more than talk.

Moreover, Europeans who have been forced into austerity may stop the music first. What I mean by that, is private depositors of European banks might not stick around to see how it all plays out.

According to the Bank of International Settlements (BIS), European banks sit on $2 trillion of debt from the PIGS nations. Indeed, a vulnerable situation.

Before the ECB started buying government debt directly from these countries in 2010 to keep them breathing, they indirectly supported their sovereign debt markets by making ultra-cheap loans to European banks. Those same banks then bought the shaky sovereign debt in Europe.

So a default or restructuring of any one of these countries would pose serious problems for the European banking system, and likely spread into a global financial crisis that could make the subprime crisis pale in comparison.

A massive run on Ireland's banks could devastate the common currency.
A massive run on Ireland’s banks could devastate the common currency.

In Ireland, a country that has been pulverized by its banks’ fast and loose lending practices, we’ve already seen a 10 percent year-over-year withdrawal of deposits from its banking system in recent months. A continued “run” on Ireland’s banks could quickly bring the façade of European/IMF rescue to an end. And it’s safe to expect similar runs on the banking system across Europe.

As you might imagine, these problems are, and will continue to be, expressed in a lower euro.

But even with the above in mind, the euro still sits 14 percent above purchasing power parity vs. the dollar.

Plus, given all of the government intervention around the world in recent years, market participants have convinced themselves that governments can impose their will on nearly everything, including saving the euro.

So we’ve seen forecasts in recent quarters for the euro to return to 1.50 versus the dollar and beyond. But if politicians could avert every problem and every disaster, we would never have economic downturns or even a single downtick in global stock markets.

If you factor in the overvaluation of the euro and the market’s misperception of its safety, a fallout could be quick and violent as people scramble to find the exit door. That presents risk to global markets, but also opportunities for investors.

The Euro’s Problems Equal Opportunity

As we’ve seen, this global economic crisis is far from being the “contained” event most global officials thought it would be back in 2008. At one point there were over 60 countries simultaneously in recession. So clearly the “Great Recession” has affected everyone worldwide.

And here’s some important perspective: History shows us that the deleveraging process of the decade-long global credit buildup is likely only less than halfway through!

So it’s safe to expect the shocks and crisis to continue. Yet it is possible to avoid the damage and capitalize on the opportunities.

Take a look at the chart below. It shows the two-year downtrend in the euro, with the path of the declining channel projecting parity versus the dollar, possibly by year end.

With the advent of exchange traded funds (ETFs), it’s easier than ever to take advantage of this opportunity — or to hedge against this outcome if you have existing exposure to the euro …

You could consider shorting the CurrencyShares Euro Trust (FXE), or buy the ProShares UltraShort Euro (EUO), an ETF designed to rise 2 percent for every 1 percent decline in the euro.



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Why is the Euro Going Down


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]


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:




China Knows the Fate of the Euro

Bryan Rich

This week, the U.S. Commerce Department gave China another pass on its currency manipulation, ruling against charges it was undercutting U.S. aluminum makers.

This puts China’s currency back on the radar for the politicians and others who, last June, were coaxed into thinking that China was making concessions on its weak currency policy. That’s when China announced they would be de-pegging the value of the yuan from the U.S. dollar.

But all of the bad interpretations surrounding China’s move off of the dollar peg this summer clearly show how confused financial market participants are on this issue …

The mainstream opinion is that China folded to the pressures from the rest of the world. That it opened the door to a big yuan revaluation, which would ultimately allow the currency to appreciate to the market’s estimate of fair value against the dollar.

That’s roughly 40 percent higher than current levels — a move that would go a long way in helping rebalance the global economy, which would be good for long-term global economic stability and growth.

However, that would entail China slowing its own economy at a time when world economies are vulnerable, all for the benefit of others. Not likely.

Instead …

History Is a Good Guide for
China’s Likely Course of Action

History shows us that China will continue to act in its own best interest by maintaining trade advantages. This, in turn, will allow the country to keep employing more of its billion-plus citizens, gathering global capital, and boosting its global economic prowess.

Just take a look at the recent history …

The chart below is the government-manipulated exchange rate of the U.S. dollar against the Chinese yuan. A fall in the exchange rate reflects a stronger yuan. You can see where China abandoned the peg against the dollar in 2005 (the red line) under the pressure of tariff threats by U.S. Congress.

Initially the Chinese government allowed the yuan to appreciate by 2.1 percent. In total, over the course of the next three years, the yuan gradually climbed another 15 percent against the dollar.

But you can also see in this chart, in late 2008 when the financial crisis was at its peak, China went back to a peg against the dollar (where the red line in the chart starts moving horizontally), which benefited them in two distinct ways  …

  1. It ensured that its most important consumer, the United States, would maintain its purchasing power, even as the U.S. dollar was retreating during much of 2009. And,
  2. Because of the dollar’s weakness, it created an even greater cost advantage in the global markets for China against its other Asian trading partners, whose currencies climbed sharply last year.

Now, after nearly two years of pegging their currency to the dollar, the Chinese are once again allowing some “flexibility” as they call it.

But there hasn’t been the major one-off revaluation of the yuan the markets have been looking for. Instead, as you can see in this shorter-term chart below, in the two months since moving off of the peg, the yuan strengthened only 1 percent against the dollar.

However, now that the world economic outlook has turned grim again, the yuan has reversed course against the dollar, weakening back toward the value of the recent peg.

Given the backdrop I described above, you might ask: Why would China alter its currency policy in the first place?

My guess:

China Wants a
Euro Hedge

What’s likely factored most heavily into China’s new currency strategy is the dismal outlook for the euro. Europe is China’s biggest export market. And the falling euro represents a major threat to China’s exports.

The euro lost nearly 20 percent of its value against the dollar from November 2009 to June of this year. All the while, China’s currency was pegged to the dollar. That means European consumers lost significant buying power against not only the dollar, but also against the yuan!

And with the structural problems surrounding the euro, it will likely resume its steep decline and may even result in a break-up of the monetary union — an end to the euro.

China is a highly export dependent economy, and maintaining a cheap currency plays a huge role in their competitiveness. So a continued revaluation of the yuan against the euro doesn’t sit well, especially given the prospects for another global economic slowdown.

China switched to a basket of  currencies to manage the yuan's exchange rate.
China switched to a basket of currencies to manage the yuan’s exchange rate.

That’s why China’s currency, under its new policy, trades against a basket of currencies, with about 60 percent less direct exposure to the dollar.

China wants its currency pegged to the dollar when the dollar is weakening. But they don’t want to be pegged to the dollar when it’s strengthening. And the latest policy dramatically diversifies away China’s exposure to a stronger dollar going forward — and consequently, the adverse effects of a weaker euro.

The key take away here: With the evidence of deflationary forces, depressed demand and the growing probability of double-dip recession, global central banks have been exposed as powerless to shorten what increasingly looks to be a long, drawn out period of economic malaise, fraught with economic shocks.

In that world, where sovereign debt defaults, global currency devaluations and a sustained safe haven rally in the dollar look likely, China has one goal: Protect its exports.



An Update On The Euro

golden euro

Late last week I produced a video on the euro (which was posted on INO’s blog on Monday), making a case that the currency was very close, if not at its highs. Since then, we have had two significant events fall into place which made the dollar skyrocket against the euro.

This new video shows you exactly what transpired and where we are so far this week. I think you’ll find it interesting and informative.

As always this video is free to watch and there is no need for registration.

I would appreciate that if you have comments on this market that you please leave them for everyone to see.


All the best,
Adam Hewison
President of INO.com
Co-founder of MarketClub

Euro – The Worst Is Yet To Come?

Hello folks. I just posted an interesting article over at my finance blog entitled “Euro; The worst is yet to come.” The article is written by Sol Palha from The Tactical Investor, and as you can tell by the title, Sol is of the opinion that the Euro is in for a far rougher ride than we’ve seen as of late. The article talks about political reasons why the Euro could receive a further beating from the markets. Of course for us forex traders that means  we should be on the lookout for good short eur/usd entries.

You can read the article in full over here: