Experts Disagree on Future Value of the Euro, U.S. Dollar Pair

by: Ralph Shell

With the terms of the second Greek bail-out nearing conclusion, the next move in the EUR/USD should be predictable. Right? Well not quite. Some of the pundits think a move to 1.50 is assured, but that may merely be the first goal as that pair climbs to 1.60 before year end. The 1.50 target is probably the more popular view, but there are others who think that pair might back off to 1.35.

The 1.60 euro bulls case rests in part on the resumption of quantitative easing after QE2 terminates July 1. Never mind this monetary tool has failed to overcome the handicap to job creation, caused by the administration's regulations, the unmeasurable future cost of Obamacare, and the treats of higher future taxation, the easy money policies must continue. Further, the feeble growth rate assures high unemployment, postponing into the distant future rate hikes. So goes the theory.

Bernanke's QE2 has been broadly and globally criticized, given as the reason for the dollar's decline and for the inflation in food and energy prices. However, in the U.S., there is some mounting opposition to the continuation of these policies.

This past week, Peter Diamond withdrew his name to serve as a Federal Reserve Governor due to Republican opposition in the Senate. Diamond, another MIT professor, was naturally an outspoken proponent of Bernanke's loose money policies. MIT, of course, is the school that has given us generations of Keynesian economists - Paul Samuelson, Larry Summers, Ben Bernanke, Christina Romer and Austan Goolsbee, the current chairman of the Council of Economic Advisers. As Keynesians they are all advocates of loose money and massive deficit spending, as advocated in The New York Times, almost daily, by Paul Krugman, another MIT guy. There is increasing evidence that the big spending MIT boys with their misguided theories have given us a debt problem that has no borders.

The current budgetary fight over the debt limit is often portrayed as a dysfunctional and irresponsible government by the liberal press. Quite possible the debt fight is a rejection of failed economic policies, and a quick and easy resolution to this budgetary war is unlikely. Yes indeed democracy can be loud and messy.

It looks like the euro bankers are going to ante up another 20/30B euros to the Greeks to quell talk about default. This may have a calming effect on bankers and traders, but will the politicians sell it to the crowd? Preparations are being made for demonstrations and possible riots in Greece. The frugal Germans have yet to express their concern about their share of the bail-out cost. Politicians in both countries had best be looking for a new line of work prior to the next election.

As we anticipated the newly elected Spanish politicians are beginning to report how much worse the financial situation really is. Yesterday it was reported in the Financial Times of London problems are coming to light:

"The central Spanish region of Castilla-La Mancha is 'totally bankrupt,' according to the incoming administration of the rightwing Popular party (PP), an accusation that will deepen concerns about Spain’s budget deficit.

Spain's 17 autonomous regions and its more than 8,000 municipalities, with 150bn euros ($220bn) of accumulated debt between them, have become the latest worry for investors in Spain and its sovereign bonds.

Catalonia, an economy the size of Portugal, says its deficit will be double the target. Vicente Tirado, a senior PP politician in Castilla-La Mancha, said the region was 'totally bankrupt,' owed suppliers such as pharmaceutical companies that provide drugs for hospitals a total of 2bn euros in unpaid bills, and would have trouble finding the money to pay the region’s 76,000 civil servants next month.

Marcial Marín, the PP’s economy coordinator in the region, accused the departing Socialist government of 'the height of irresponsibility' and alleged that unpaid bills were being destroyed to hide the evidence."

If we get Greece from the spotlight, will Spain be the next problem?

As we suspected Friday's run up above 1.4650 in the EUR/USD went too far and too fast. The futures market did attract a few new buyers, an increase of 4,883 contracts, so there was more than short covering at work on the rally.

Depending how events unfold, this pair has a chance of trading at 1.35 or 1.50 plus so it is best to stay nimble. The daily chart looks bullish with a well defined bullish channel. A sell off to the five-day SMA would take you to about 1.45. On the 4H chart the middle of the 20 day BB looks to be around 1.4530. There is a trend line in the vicinity of 1.45. The 14 period 4H RSI has turned lower after being an overbought 76. Let's try the buy side of the euro on a break under 1.45. and see if the euro bankers can calm the debt holders. As always watch your stops.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.