A Bad Week For The Euro

Includes: FXE, UDN, UUP
by: Ralph Shell

So much for the big support in the euro versus the USD at 1.30. The high was made on Monday and the market reversed and has since plunged lower. The catalyst for this week's sell off of course was the Italian election of candidates who do not want to take orders from Frankfurt or Brussels. In fact, the ex-comedian, Beppe Grillo, leader of the populist Five Star Movement, does not want to form an alliance with anyone.

Over 55% of the voters cast their ballot for those voicing opposition to the austerity policies imposed by the by the technocrat Monti. Grillo's refusal to compromise and form a government with other parties has created a political stalemate, with chaos resulting. Should there be a quick resolution, this would give us a rally in the euro, but this seems unlikely.

The evolving political vacuum in Italy has hurt both the Italian equity and bond markets. Despite the political uncertainty Italy was successful selling €6.5B of debt though at higher prices. The Italian ten year bond sold to yield 4.83%, a big premium to the German ten year rate of about 1.45%. Italy is the world's third largest issuer of debt. This year the total borrowing needs of the Italian government to cover the deficit, and the refinance maturing debt will be about 25% of the GDP, or about €390B.

Today the unemployment numbers were announced for Europe. Total EU unemployment is now at a record of 11.9%, or about 19M people. For the four largest economies the rates are Germany 6.9%, France 10.6%, Italy, 11.7%, and Spain at 16.2%. Clearly, the austerity policies as recommended by the Northern Europeans, is causing harm for many. This coming Wednesday the EU GDP numbers will be announced, estimated to be -0.6 for the most recent quarter and -0.9 for last year.

Most of the economic reports from the US have been positive this past week. US Consumer Confidence was sharply high, from 58.4 to 69.6, the Bernanke testimony to Congress was positively received by the markets, pending home sales were up 4.5%, the GDP, though not good, was up to a positive 0.1, and the US ISM Manufacturing PMI, at 54.2 was better than expected.

A partial list of next week's US reports include the US trade balance, expected to be up from last month's recent record low of $38.5B, the US NFP report, estimated to be 160K, and the US unemployment rate estimated to be 7.9%. The data calendar does not include the Washington debate over the mandatory spending reduction. In Italy the market is weak because of no leadership, but in the US the market has ignored the consequences of bad leadership. How long will the latter continue?

Today the EURUSD (FXE,UUP) has taken out the 2013 low by a few pips, and has now rallied back above the 1.30 handle. Should this hold for the balance of the week then how do we next trade it? Will we get another Monday rally to sell? There are too many variables to make a call for Monday.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.