2/21/2013 0 Comments
The euro continues to drop
The Euro has taken a decent drop in currency terms since the posting on the 4th which has prompted me to add to my short position at this point. While the leaders of the area have not committed to a pro growth (and subsequently anti currency) agenda, there are many signs that point to that option as the only real alternative. A slowdown in manufacturing and the news coming out of the US points to a global slowdown that could have negative effects on the euro zone without a pro growth agenda (both scenarios one could argue will be bearish for the currency in the medium to longer term). Add to this the minutes from the US Federal reserve citing concerns about the amount of stimulus that is being pumped into the US economy and you have a good case for the dollar to appreciate to the EUR even without a clear commitment of a stimulative agenda. On the other side of the spectrum, a severe slowdown in the global economy could see the ECB start to use OMTs to keep interest rates in at risk countries from moving to high again.
I would use any spike in the currency (perhaps the Italian elections will be that catalyst) to add to a position for a longer term move towards the 1.30 mark and even lower after the German elections in the last half of the year.
The talk of currency wars has heated up the headlines of financial papers. With the US and Japan initiating stimulative measures on their currencies, and others following suit, there is alot of talk about who is going to "win" the war and devalue their way to an export driven recovery.
I think that the true winner has yet to enter the fight; Europe. With the majority of the EU countries contracting and the larger core countries starting to slow down, the opportunity for a cut in rates and outright monetary policy is possible, and even warranted. The union cannot afford to have their economies shrink at the expenses of developed countries devaluing their way to competitiveness. Because of this the ECB will have to take part in the fight and do so agressively to keep growth rate above the average interest rate, thus creating true growth.
To this end I would like to see the Euro zone countries take more stimulative actions that will stem the rise in the Euro and even reverse it in the future, this will be the only way to keep foreigners buying their goods as the rest of the world looks to take their market share. This week's ECB meeting will hopefully address this concern and provide some light on the level of interest this has gotten with the ECB.
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