Best of the Week
Most Popular
1.U.S. Housing Bull Market Over? House Prices Trend Forecast Current State - Nadeem_Walayat
2.The Coming U.S. Economic Collapse Will Trigger a Revolution - Harry_Dent
3. Stock Market Crash a Historical Pattern? - Wim_Grommen
4.Global Panic - U.S. Federal Government Stockpiling Ammo – Here’s What We’re Going to Do - Shah Gilani
5.AI, Robotics, and the Future of Jobs - Aaron Smith
6.This is Your Economic Recovery With and Without Drugs - James_Quinn
7.Gold and Silver Price Getting Set To Explode Higher - Austin_Galt
8.The Something for Nothing Society - Lifecycle of Bureaucracy - Ty_Andros
9.Another Interesting Stock Market Juncture - Tony_Caldaro
10.Inflation vs the Deflationary Straw Man - Gary_Tanashian
Last 5 days
The Ultimate Demise Of The Euro Union - 1st Sep 14
Palladium Price Breaks Multi-Year High Over $900 - 1st Sep 14
When Complexity Becomes Chaos - 1st Sep 14
Designer War By Default - 1st Sep 14
Islamic State or Russia? Ten Key Questions Towards Pragmatism - 1st Sep 14
Mixed Emotions for the Gold Market - 1st Sep 14
These Clowns Are Dragging Us Into War with Russia - 1st Sep 14
Marx And The Capitalist Cancer Of Overproduction - 1st Sep 14
Scottish Banks Salivating at the Prospects for an Independent Scotland of 6 Million Debt Slaves - 1st Sep 14
Small Man Europe Is Now In “Effective State Of War” With Russia - 31st Aug 14
The Unintended Blowback Of False Flags - 31st Aug 14
Tesco Supermarket Death Spiral Latest Profits Warning and Dividend Slashed - 31st Aug 14
Dow, Gold and Silver - A Last Stand, A Fake Out And A Surge - 31st Aug 14
If U.S. Consumers are so Confident Why aren't They Spending? - 31st Aug 14
Scotland Independence House Prices Crash, Deflationary Debt Death Spiral - 31st Aug 14
Obama’s “Catastrophic Defeat” in Ukraine - 30th Aug 14
Stock Market Inflection Point Approaching - 30th Aug 14
Gold And Silver - Elite's NWO Losing Traction. Expect More War - 30th Aug 14
Corporations Join Droves of Americans Renouncing US Citizenship - 30th Aug 14
Peter Schiff U.S. Housing Market, House Prices Bubble Warning - 30th Aug 14
Russia, Ukraine War - It’s Time to Play the “Gazprom Card” - 29th Aug 14
The One Tech Stock Investment You Should Never Sell - 29th Aug 14
Bitcoin Price $500 as Current Downside Barrier - 29th Aug 14
Don't Get Ruined by These 10 Popular Stock Market Investment Myths - 29th Aug 14
Low Cost Transcontinental Gold - 29th Aug 14
Gold Bullish Central Banks Should Give Money Directly To The People - Helicopter Janet? - 29th Aug 14
US House Prices Bull Market Over? Trend Forecast Video - 29th Aug 14
The Fed Meeting at Jackson Hole Exposed Yellen’s Greatest Weakness - 29th Aug 14
AAPL Apple Stock About To Get sMACked - 29th Aug 14
A History of Unlimited Money: Learn From It or Repeat Its Mistakes - 29th Aug 14
How You Can Play to Win When Market Makers Are Calling the Shots - 28th Aug 14
EU Gas Supply Is In Real And Imminent Danger - 28th Aug 14
Central Banks at the Root of Evil - 28th Aug 14
European Bond Market: Bubble of all Bubbles! - 28th Aug 14
Employers Aren’t Just Whining: The “Skills Gap” Is Real - 28th Aug 14
The ISIS Menace - Just What We Need, Another War - 27th Aug 14
The Risky Business of Methane-Rich “Fire Ice” - 27th Aug 14
CFR Recommends Policy Shift that is Very Bullish for Gold - 27th Aug 14
Ukraine Standoff Signals Global Power Shift - 27th Aug 14
Stock Market Panic Decline Begins - 27th Aug 14
The Monopoly of the Government Education Cartel - 27th Aug 14
How to Invest in Silver Today for Double-Digit Gains - 27th Aug 14
The Big Solar Energy Breakthrough We've Been Waiting For - 27th Aug 14
U.S. Empire’s Bumpy Ride - 27th Aug 14
Gold Market and the Interest Rate Trap - 27th Aug 14
Stock Market Staring Into the Great Abyss - 27th Aug 14
A Look at the Coming 30-year Inflation Cycle - 27th Aug 14
Forex Trading - Will USD/CHF Rally Above 0.9200? - 27th Aug 14
Europe’s Depressing Economy Dog Days of Summer - 27th Aug 14
How The Coming Silver Price Bubble Will Develop - 26th Aug 14
A Nation of Shopkeepers - Supply-Side (Voodoo) Economics? - 26th Aug 14
Stock Market Bear Tracks Abound In Wall Street - 26th Aug 14
65,000 U.S. Marines Hold up a Mirror to the Economy - 26th Aug 14
Bitcoin Market Provides Clues for Investors - 26th Aug 14
The Key to Trading Success - 26th Aug 14
Will The US Succeed in Breaking Russia to Maintain Dollar Hegemony?... - 26th Aug 14
Even Mainstream Academia Worried about Massive Bubbles in Markets - 26th Aug 14
Iraq and Syria Follow Lebanon's Precedent - 26th Aug 14
Colonization by Bankruptcy: The High-stakes Chess Match for Argentina - 26th Aug 14
Dow Stock Index On The Cusp - 26th Aug 14
Prohibition Laws and Agency Regulations - 26th Aug 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Biggest lie in Stock Market History Revealed

QE2's Done, Now Euro and European Debt Crisis To Take Center Stage

Currencies / Euro Nov 09, 2010 - 04:55 AM GMT

By: Dian_L_Chu

Currencies

Diamond Rated - Best Financial Markets Analysis ArticleOver the past month or so, world`s focus, currency markets in particular, has been centered mainly on the U.S. over QE2, the November elections, and the Job`s Report. As such, there have been some interesting headlines coming out of Europe that went quietly under the radar as Wall Street became infatuated with their own bullish sentiment.

Now, with QE2 and mid-term election pretty much behind us, guess where the market’s attention will shift to next?


The euro, which has been strengthening across the board for a while, was noticeably weaker last week considering the bullish sentiment, which really bolsters the European currency during ebullient US and world market breakout moves to the upside.

Trichet’s Telegraph

There were also telltale clues from the press conference of ECB President Jean-Claude Trichet last Thursday after ECB’s decision to leave interest rates unchanged. The press conference was filled with numerous questions regarding the record high Irish bond spread, and the ever widening bond spread of the other highly indebted EU members--Greece, Spain and Portugal.

That basically telegraphed the European debt crisis will start to take center stage once again.

Spread at Euro Life Time High

Sure enough, on Monday, the Portuguese and Irish government bond spread hit their highest in the euro's lifetime with Irish 10-year bond and the German Bund widened to 557 basis points while the Portuguese 10-year versus the Bund expanded to 450 bps. (see Bond Yield Chart)

In fact, the bond interest rate of Ireland, Portugal and Spain, have been rising ever since German Chancellor Angela Merkel said any future EU bailouts is expected to come with new rules requiring bondholders to absorb some losses, which was further elaborated by German Finance Minister Wolfgang Schaeuble in a an interview with Der Spiegel.

Ireland & Portugal - The New Center of Crisis

Meanwhile, Greek bond had a little rally after the election poll, but that does not alter its ominous overall debt picture. Nevertheless, Greece is pretty much old news, and now it’s Ireland's and Portugal's turn to take a beating from the widespread investors skepticism.

Market players expect Portugal to issue up to 1.25 billion euros of five and ten-year bonds this week, while Ireland says it has sufficient cash until mid-2011 (such reassurance to bond buyers) and plans to resume bond auctions in January.

But with ECB seemingly the only major buyer of European bonds in recent weeks, and at such high yield levels, investors pretty much bet on both countries will eventually join Greece for a bailout by the EU and International Monetary Fund (IMF).

Head of the Debt Class

Of course, fresh deficit figures from Eurostat last month only add to the pessimism. According to Eurostat, Ireland’s budget deficit was the highest among EU members at 14.4 percent of GDP last year, ahead of Spain at 11.1 percent and Portugal at 9.3 percent. (By the way, the UK came in second to Ireland with a deficit of 11.4 percent of GDP.)

Debt Projection – Bad

The more eye-popping news is that Irish deficit is set to rise to an unprecedented 32 percent this year—a modern European record-- due to the one-off costs associated with the bank bailout.

The situation seems so dire that in an article in the Irish Times, the "Dr. Doom" of Ireland--University College Dublin economics Professor Morgan Kelly--concluded that

"We [Ireland] are no longer a sovereign nation in any meaningful sense of that term. From here on, for better or worse, we can only rely on the kindness of strangers."
The debt projection is even more depressing for Portugal and other EU peripheries (See Debt Projection Chart), whereas the UK debt outlook is not that rosy either.

Growth Forecast - Worse

While the US is depressed over its 9.6% unemployment rate, just imagine Spain`s 20.5% unemployment rate, not to mention the slower growth prospects (see Growth Forecast Chart) due to the implementation of numerous Austerity programs throughout European Union member states.

Something Bullish About The Dollar

In short, analysts may be inclined to be bearish on the US dollar due to Mr. Bernanke`s QE2 campaign. However, the European Union and namely the Euro currency may be much worse off than the US dollar, considering the US can actually still finance its debt at much lower rates right now.

Furthermore, the US only has ONE country to manage, whereas the European Union has 27 member states with 16 utilizing the Euro as a single currency, with the high powered Germany at one end of the fiscally responsible spectrum, and lowly Greece and Ireland at the other end. The GDP comparison chart here also bears a similar message.

Euro To Retrace

After the initial reaction regarding QE2 where the euro approached 1.43 on the Eeuro/Dollar currency cross, it is now hovering just above 1.38. It seems very likely that euro could break through the 1.38 level this or next week, and head much lower to around 1.35 over the next month on European debt concerns, which will be back on the front burner as markets focus away from the US and back on Europe.

The comparison is not a favorable one from a currency evaluation standpoint. What you have is a contest where you are trying to find the proverbial dog with the least flees on it, and at these levels, I am not sure the euro is the winner in this currency contest.

Remember, just this summer the euro was trading at 1.18 against the dollar, it has come a long way in a short time, and is probably due for a correction lower to the 1.30-1.35 range over the next 6 months. (See Euro Technical Chart)

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at Economic Forecasts & Opinions.

© 2010 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014