Best of the Week
Most Popular
1.U.S. Inner City Turmoil and Other Crises: Ron Pauls Predictions for 2015 - Dr_Ron_Paul
2. What’s In Store For Gold Price in 2015? - Ben Kramer-Miller
3.Crude Oil Price Ten Year Forecast to 2025: Importers Set to Receive a $600 Billion Refund - Andrew_Butter
4.Je ne suis pas Charlie - I am not Charlie - Nadeem_Walayat
5.The New Normal for Oil? - Marin_Katusa
6.Will Collapse in Oil Price Cause a Stock Market Crash? - OilPrice.com
7.UK CPI Inflation Smoke and Mirrors Deflation Warning, Inflation Mega-trend is Exponential - Nadeem_Walayat
8.Winter Storms Snow and Wind Tree Damage Dangers, DIY Pruning - Nadeem_Walayat
9.Oil Price Crash and SNP Independent Scotland Economic Collapse Bankruptcy - Nadeem_Walayat
10.U.S. Housing Market Bubble 2.0 Meet the Pin - James_Quinn
Last 5 days
Draghi's "No-growth" QE Money for Stocks, Zilch for the Economy - 25th Jan 15
Unjust and Undeclared Wars - 25th Jan 15
The European Central Bank Commits Monetary Suicide - 25th Jan 15
Stock Market ECB EQE week - 25th Jan 15
Gold And Silver Timing Is Most Important Element - 25th Jan 15
The Best Way to Invest in the Next Alibaba Internet Stock IPO - 25th Jan 15
The Outpatient Surgery Business Rains Cash into Healthcare Stocks - 25th Jan 15
Stock Traders Flock to Gold GLD ETF - 24th Jan 15
10 Reasons Why You Need an Offshore Bank Account - 24th Jan 15
Goldman Sachs Blankfein - Regulation is Like Background Noise - 24th Jan 15
Gold in Euros Surges As ECB To Print Trillion Euros and Greek Election This Sunday - 24th Jan 15
Gold Bear Market Rally or New Bull ? - 24th Jan 15
Euro-zone 'QE already Working' Says IMF Lagarde - 23rd Jan 15
ECB and EU LTRO and QE for Dummies: Or, Make These Trades - 23rd Jan 15
Debt and Deflation: Three Financial Forecasts - There's More Than Falling Prices - 23rd Jan 15
Market Should Not Doubt' Mario Draghi ECB QE - 23rd Jan 15
Francs, Bonds, Barrels, and Bail-Ins - 23rd Jan 15
Are Plunging Petrodollar Revenues Behind the Fed’s Projected Rate Hikes? - 22nd Jan 15
Stocks Bear Market Lessons from History - 22nd Jan 15
Russia's Plans for Arctic Supremacy - 22nd Jan 15
166 Trillion Reasons Why Bank Stocks Are So Cheap - 22nd Jan 15
Will Gold Price Break Out Once Again? - 22nd Jan 15
The Cult of Central Banking - 21st Jan 15
Five Stock Market Questions Wall Street Hopes You’ll Never Ask - 21st Jan 15
China's Yuan Enters the Currency "Big Leagues" to Take on the Dollar - 21st Jan 15
Investor implications of QE by the ECB - 21st Jan 15
Deflation Bonanza! And the Fool's Mission to Stop It - 21st Jan 15
Messin' With My Financial Brain - 21st Jan 15
Are Stock Market Buyouts Checking Out? - 20th Jan 15
Legal “Steroids” Are Making This Tech Stock a “Buy” - 20th Jan 15
Are Stock Market Storm Clouds Massing? - 20th Jan 15
The Swiss Release the Kraken! - 20th Jan 15
The European Union, Nationalism and the Crisis of Europe - 20th Jan 15
Swiss Say No to QE - 20th Jan 15
Gold Demand Explodes as Volatility and Fear Stalk Market - 20th Jan 15
The Truth About This Stock Market "Meltdown" Indicator - 20th Jan 15
Markets 2015 More Of The Same? - 20th Jan 15
Is Market Sentiment Shifting to Gold? - 20th Jan 15
U.S. Dollar’s Major Breakout and Gold’s Simultaneous Rally - 19th Jan 15
Silver Price Breaks Out on Swiss France Euro Decoupling - 19th Jan 15
Gold Bullish Inverse Head and Shoulders Pattern - 19th Jan 15
Bundesbank Announces Repatriation of 120 Tonnes of Gold from Paris and New York Federal Reserve - 19th Jan 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

State of US Markets 2015 Report

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