Is Stanley Fischer Signalling a Euro Short?

Includes: FXE, UDN
by: Michael Eisenberg
I have written frequently about Bank of Israel Governor Stanley Fischer's insightful views of market dynamics and insistence on surprising the markets. In that light, the world should take note of Fischer's raising of Israel's interest rates on Tuesday by 0.25%.
You see, Fischer is looking to both cool off Israel's housing market and Israel's creeping inflation. However, Fischer's challenge in using interest rates to cool both of those indicators has been the strengthening Shekel, particularly against the US Dollar. The strengthening Shekel has become hard for Israel's export oriented economy whose most important market is the United States. The rising shekel is making Israel's tech workers and exports more expensive in Dollar terms and Fischer is walking a tightrope in trying to cool the economy and not hurting exports.
Therefore, the surprise increase in Israel's interest rates Tuesday is worth noting. In my opinion, Fischer is spotting a significant weakening of the Euro due to the debt contagion and slowing economic growth in Europe. Fischer must believe that the debt and slower growth will likely hurt the Euro, forcing currency traders to flee to the "Safer" Dollar and strengthening the Dollar. This gives Fischer some leeway to raise interest on the Shekel, by using the weakening Euro and flight to the Dollar as air-cover to keep the Dollar/Shekel exchange rate relatively stable.
So if you are long Euros or long Euro Bonds, you may want to take note of the prescient Fischer and the interest rate on the Shekel.