Euro: New Year, New Challenges

by Ashraf Laidi
Jan 5, 2011 19:25 | 27 Comments

One interesting aspect of todays blow out +297K rise in Dec ADP is the cautious interpretations circulated for Fridays release of Dec Nonfarm payrolls. Recall the disappointing 39K increase in Nov payrolls from +172 in Oct despite the unexpectedly strong +92K ADP in Nov. Nonetheless, both the US dollar and 10 year yields are rallying across the board of further growth recovery in the US. Noting that Fed Chairman Bernanke will testify to Congress 1 hour after Friday's jobs report, we would expect the Chairman to reiterate the case for buying the entire $600 bln in QE2 even in the event that Dec payrolls show a blowout number with similar proportions to today's ADP (above 220K-250K). Yet despite those reiterations of QE2, bond yields will likely hold on to their upward trajectory eyeing 3.80% before ultimately regaining 4.10-15% in late Q1, which should help support USD vs. EUR, GBP and JPY.

Before we get to the fundamental arguments hampering the euro, see below the key technical charts making the case against the single currency. The first two charts are a reiteration of my November analysis calling for $1.27 in EURUSD. The weekly chart (left) highlights the fact that a sustainable close below the 55-week MA will likely call up a 12-15% decline, as was the case in the break of August 2008 and January 2010. Since having broken below its 55-week MA in late November, EURUSD never could regain this important measure of trend.

Euro: New Year, New Challenges - EURMONTHLY Jan 2011 (Chart 1)

Euro: New Year, New Challenges - USGERYIELDS Jan 2011 (Chart 2)

Euro Bearishness: No Change The Eurozone debt problem is no longer limited to rising borrowing costs and maturing debt of sovereign nations. The rise of Spanish municipal and private bank debt (accounting for over 40% of total new issuance in 2011) will further complicate any future debt resolution as far as priorities to creditors. The diversity of the Eurozone debt problem should also continue to weigh on the euro. Ireland is dragged by undercapitalised banks (solvency and liquidity problem), while Spain and Portugal sovereigns and banks are primarily suffering from a liquidity shortage. The liquidity problem is most punishing when bond yields are easily propped by event risk that is unrelated to the Eurozone (China rate hike, negative US earnings or emerging market-related events). Meanwhile, Portugal is increasingly seen likely to receive a bailout about (about 60 bln) after Greece received 110 bln and Ireland 85 bln

To Reschedule or not to Reschedule
The growing dissent between the ECB and Eurozone politicians (primarily Merkel & Sarkozy) regarding the need for debt restructuring should emerge at the expense of the single currency. The main reason the ECB is against the notion of bondholders bearing the brunt of debt rescheduling is the escalating debt costs to sovereign and private borrowers as well as the consequences on local citizens. Unlike in the case of Latin American and Asian debt crises when debt reschedulings impacted mainly foreign creditors, a Eurozone rescheduling would have considerable consequences on local finances due to the involvement of local players (banks, brokerages and local investors) in these public debt. As a result, local citizens would fall victim in all facets of the spectrum (small bank accounts, small and first time home buyers and those who are already unemployed.

Here is my CNBC interview yesterday with Erin Burnett discussing the euro's challenges on its 12 year anniversary.

Euro Outlook ahead
Despite robust business surveys in the Eurozone and strong recovery in Germany, the euro remains unable to stage any meaningful recovery even against the weak USD-- While the euro is expected to find its way towards $1.27 and potentially to as low as 1.22, The trades of higher confidence remain that of selling euro against the Canadian dollar (robust energy prices, stable US demand), Norwegian Krona (tightening cycle not yet over, sturdy exports and improving Baltics) as well as the Singapore dollar (tightening policy geared at containing price and real estate inflation).

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Comments (Showing latest 10 of 27) View All Comments
uro
Hasselt, Belgium
Posts: 1
3 years ago
Mar 6, 2011 11:36
Hello Ashraf,
With recent evolution, do you still stay bearish euro on the middle term ?
said
mulhouse, France
Posts: 2822
3 years ago
Feb 1, 2011 20:34
eh ashraf
i saw brutus. the bbcw wearther guy trumped with bruce at the montreal uni.
ashraf
send by adia chairman?
said
mulhouse, France
Posts: 2822
3 years ago
Jan 31, 2011 9:34
eh guys seven minutes of no com
no more script express.
said
France
Posted Anonymously
3 years ago
Jan 30, 2011 20:03
double pied
said
mulhouse, France
Posts: 2822
3 years ago
Jan 30, 2011 19:39
duble pi
sheikh
dina, Pakistan
Posted Anonymously
3 years ago
Jan 29, 2011 15:16
eur usd
David Antonio
Kuala Lumpur, Malaysia
Posted Anonymously
3 years ago
Jan 26, 2011 22:59
This is a good analysis, its seems that we are in for a ride

Thanks

David Antonio
http://fxcrashcourse.com/
catnip
Frankfurt, Germany
Posted Anonymously
4 years ago
Jan 18, 2011 18:27
anauel63 ok one serious trader yes if yield differentials matter they are as of now no longer in favor of EUR while OIS spreads continue to move against the USD , that's a result of Ezone meeting blah blah. It will soon turn out its blah blah. Fact is none of PIIGS can sustain the rates at which bonds sold. No blah blah can alter this.
anauel63
london, UK
Posts: 34
4 years ago
Jan 18, 2011 18:03
Hi Ashraf,I have a question?: the long end of the bund is slightly dflatening ; is that means investors do not trust the EU governments for the long-term?
adamcpf
Lisbon, Portugal
Posts: 58
4 years ago
Jan 13, 2011 22:29
@ DaveO/Catnip,

Thanks for your comments. I also believe it was just talk as seriously it's the last thing we need here.