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Cliff Wachtel
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Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for Caesartrade.com, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
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  • THE SECOND ANNUAL EU SPRING BREAK (DOWN) & EUR COLLAPSE 2 comments
    Mar 11, 2011 8:54 AM | about stocks: UUP, UDN, FXA, FXB, FXC, FXD, FXE, EUO, FXF, FXEN, FXY, JYF, AUNZ, CYB, GLD, CNY, USO, DUG, DBV, ICI, CEW, SLV, OIL, SPY, SDS, RSW, BXDC, SPXU, SH, QQQ, DIA, EWC, EWA, TLT, XHB, ITM, ERO, IGOV, VGK, TBT, GSG, DBC, CORN, ICN, SZR, BZF, GRU, DAX, FRC, DB, SAN, USL, BNO

    The Euro is likely headed much lower in the coming weeks. Here are the 6 reasons why, & how to profit handsomely from the trend via forex binary options, standard spot forex,  forex  ETFs, stock indexes, and more.

    The Primary Two Driver’s Behind The Euro’s Rally Are Exhausted

    These were:

    1. Rising optimism about growth (aka risk appetite). That is over as long as the MENA region turmoil continues to raise doubts about oil supplies and sent oil prices spiking. Oil is up from $85 to around $105. It’s widely believed that for every $10 increase in oil, GDP of oil importing nations (almost everyone) falls by at least 0.2%. With the EU, China, and much of the emerging market nations raising interest rates and cutting spending, growth was already expected to soften. Now there is greater risk of stagnation. The weaker peripheral economies were already stagnant, and now face higher risks of outright contraction, as we’re seeing in Greece, Spain, and possibly the UK.

    The EURUSD, EURJPY, EURCHF and EURGBP are risk assets, they rise with optimism and fall with pessimism. Falling risk appetite means these are likely to fall unless there is some unique bullish factor for the EUR or bearish consideration for these counterpart currencies.

    Indeed, if oil spikes higher, that alone could be enough to send the below pairs lower (along with most other risk assets) even if the EU sovereign debt and banking crisis ended tomorrow. However as we discuss below, it is likely to get much worse in the coming weeks.

    1. Speculation About interest rate increases from the ECB. These expectations were so potent that the EUR kept rising even as MENA unrest hit Egypt, PIIGS bond yields rose (reflecting fear about their credit worthiness) and Ireland threatened to renege on its bailout commitments.

    On March 3rd the ECB indicated it would be raising rates soon, and so these expectations are now largely priced in.

    The Second Annual EU Spring Break (Down) & EUR Collapse

    The third reason the EUR is going down over the coming weeks (possibly much longer) is the rising likelihood of another bout of EU solvency fears.

    THE SHORT VERSION

    To avoid another bout of EU debt crisis and global market crashes, the PIIGS nations need a bigger bailout fund. That would assure markets that there’s no imminent threat of EU defaults. However EU leaders will be unable to come to an agreement on this until the EU hits another crisis stage that threatens global markets. That process is likely to take weeks if not months. During this time, the EUR is very likely to head lower, possibly much lower, especially as the fear levels peak. For full details on the historical patterns of the EU crisis see here and here.

    THE DETAILS: THE WHAT, HOW, WHY

    Yields of sovereign Greek, Portuguese, and other PIIGS nations bonds are at record highs. Ireland, Greece, and Spain have been hit with recent credit rating downgrades. With the distraction of speculation over ECB rate increases over, the bearish realities of the EU crisis are now back in focus.

    The key point: because the PIIGS nations can’t afford their current debt levels, there is no real solution to the EU debt crisis beyond granting them at least partial defaults, politely known as debt restructure. The EU is not yet ready to admit that and face the solvency issues that would cause for EU banking. We discuss the issue in more detail here and here.

    Thus the only thing that can calm fears about the EZ and the EUR is another, larger bailout fund that is large enough to cover a bailout for the country everyone is really worried about, Spain. The current fund isn’t big enough. That will require the funding nations to commit to volunteering more of their taxpayers’ cash, and debtor nations to accept a combination of further painful measure, be they spending cuts, tax hikes, EU control of their budgets and economies, etc.

    If last year’s spring EU break (down) is any guide, EU leaders won’t come to an agreement until there is a serious risk of a sovereign default, which all know will risk a global market crash.

    Why?

    Because one sovereign default is likely be followed by a wave of them (none will be able to sell bonds at affordable rates).

    The mere threat of that is enough to also cause a crisis in the EU banking system that holds most of these questionable bonds. The Lehman Bros. collapse was enough to spark crisis, so all the more so would an EU banking crisis.

    So at that point, leaders of both the nations funding the enlarged bailout plan needed to buy time (Germany, France, even the US via the IMF), and of the debtor PIIGS nations, can then risk telling their voters that there was no choice but to take the pain.

    WHAT’S THE PAIN?

    For funding countries, it’s the need to pay taxpayer funds into the new bailout fund (last year’s $1 trillion package bought them a year’s time)

    For debtor nations, it’s the need to accept more concessions to receive the funds/loans, like spending cuts, EU supervision of their economies, higher tax rates and better tax collection, etc.

    HOW LONG IS THIS DOWN TREND LIKELY TO LAST?

    Last year the drama played out over 6 months from December through May. This year the learning curve may be shorter as all remember how last year developed, and an agreement may appear faster.

    Thus the big down move in the EURUSD and other EUR related assets may come in a matter of weeks. The extent and duration of the move will depends on how quickly EU and IMF officials recognize that last year’s spring EU meltdown is repeating, and conjure up both the needed funds (and debtor nation concessions) for a bailout big enough to cover any likely default risks (i.e. Spain). These are political decisions, inherently unpredictable.

    HOW LOW CAN IT GO?

    That depends mostly on how long it takes to get the next bailout agreement arranged. Last May the EURUSD hit 10 year lows around 1.1900.

    Note the below EURUSD weekly chart.

    ScreenHunter 03 Mar 11 15 22 1024x612  The Second Annual EU Spring Break (Down) & EUR Collapse

    EURUSD WEEKLY CHART COURTESY OF ANYOPTION.COM   03MAR 11 1522

    Currently the pair is around 1.3772, with weekly support levels around 1.3638, 1.3467 (both 50 and 200 week moving averages there) 1.3165, 1.2875, 1.2682 and 1.2400 next up.

    Three Other Immediate Threats To Risk Assets Like Stocks & The EUR
    1. Further MENA unrest and it’s affects on oil prices is clearly the big one for now
    1. Defaults from other, non-PIIGS nations.  There are many nations in both the EU and elsewhere that are far more likely to default than Spain, like the Ukraine, Dubai, Egypt, and Hungary.  Seehere for details. Remember, the entire EU sovereign debt and banking crisis didn’t become a market focus until Dubai’s announced ‘restructure’ focused attention on sovereign debt issues. So defaults from these nations could also spook credit markets, raise borrowing costs for other weak states and thus threaten further defaults just as much as the a PIIGS nation default.
    1. The usual wildcards: These threats exist and periodically scare markets, but timing them is impossible without inside information. They include Korean military conflict, a China property bubble and banking collapse, etc.
    How To Profit
    for continuation see article by the same title at: http://globalmarkets.anyoption.com.

    Those seeking a video illustration of the above, see: ONLY ANOTHER CRISIS CAN SAVE THE EURO at http://www.youtube.com/watch?v=rfs2RjXGaL0

    Disclosure: Author is short the EUR for personal portfolio as a multi-week trade awaiting a EUR breakdown as the reality of EU debt crisis and/or restructure dawns.

    Disclaimer: The above is for informational purposes only and not to be construed as specific trading advice. Responsibility for trade decisions is solely with the reader.







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Comments (2)
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  • andresdixon1
    , contributor
    Comment (1) | Send Message
     
    A fall in the Euro will lead to a great opportunity to invest in foreign exchange trading. It will help you generate offer fantastic profits.
    5 Apr 2011, 08:43 PM Reply Like
  • stephentiklo
    , contributor
    Comment (1) | Send Message
     
    Making money through foreign exchange requires a steady fall in the currency. This is exactly what is offered by a sharp decline in the Euro.
    5 Apr 2011, 08:51 PM Reply Like
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