Euro Bounces From New Low, What's Next?

Includes: FXE, RBL
by: Ralph Shell

This morning the euro tumbled down to 1.2110 on bearish economic news, projections that the austerity budgets would slow the recovery in Europe and result in Euro-bank loses. Unemployment edged higher to 10.1%, almost 16M in the Euro community. German unemployment did drop to 7.1% but they were the exception. Spain, which has recently addressed their budget deficits had unemployment at 19.7%.

The negativity toward the euro this morning was compounded by British report for The Centre for Economic and Business Research, a London based consulting firm, that advised the Greek's leave the euro and default on their debt. With a devalued currency, this might leave the Greek's in a position to compete with exports and offer incoming tourist cheaper rates. A departure from the euro would inflict major damage on the lending banks, primarily German and French, and would leave in limbo the future status of the Spanish and the Portuguese.

Meanwhile, do the Russians have a euro position which is too big to fail? Tomorrow the EU and the Russians have a summit meeting scheduled. The Financial Times reports that Russia has 41% of its $460.7B hard currency reserves in euros. The past tensions over natural gas prices has abated as cheaper liquefied gas from the Middle East has become available, and newer techniques for development of Europe's shale gas have been developed. Maybe it is in the Russians best interest to bail out a couple of German and French banks, in an effort to prop up the euro.

Germany's Angela Merkel has been a vigorous proponent of a strong euro, a policy that has not hurt the German economy, but has put the less productive Mediterranean euro members at a disadvantage. Recently her support, albeit reluctant, of the Euro Banks purchases of the sub prime sovereign bonds, cost her votes in a recent election, and she now has another problem. The president of Germany, Horst Koehler has resigned, as reported by Market Watch: "At a time when Europe requires political leadership, German politics have sunk into a mess," wrote economists at BNP Paribas, in a research note."

The euro did bounce smartly after printing a new low, back up to 1.2350, and is now trading at 1.2280. The euro has a lot of problems, which is, of course, why we are trading in the low 1.20's. Our preference is the short side, but we are perplexed how quickly the market rallied today so we are going to give it some room. Further, just how would the euro perform is there was a defection by one of the weaker countries from the euro?

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Disclosure: No positions