Crisis of Confidence in the EU

Home
>
Currency Trading
>
Crisis of Confidence in the EU

Crisis of Confidence in the EU

The European Union (EU) constitution was dealt a double blow, first by a French "no" vote on 29-May and then by a follow on "no" from the Netherlands on 01-Jun. To add insult to injury, one low level Italian diplomat quickly called for a referendum in Italy to decide if a return to the lira was warranted. Additionally, Prime Minister Tony Blair, who took over leadership of the EU on 01-Jul, indefinitely postponed the British referendum on the EU constitution.

This news along with plenty of speculation about the repercussions dominated the international headlines for much of the month of June. Not surprisingly, all the hubbub about the EU had a direct impact on the FX market. The euro fell to a new seven month low following the French referendum, reaching a low of 1.2371 and the "single currency" has been under pressure ever since. Probes below the 1.2000 level were seen ahead of 30-Jun, suggesting additional near term downside potential toward 1.1756 and beyond.

Since the inception of the euro in 1999 central banks, especially those in Asia and the Middle East were seen diversifying out of dollars into the euro. They were not only looking to scale back their substantial dollar holdings in the face of a declining market, but they also sought the higher returns available in the eurozone. However, returns on eurozone deposits slipped below those in the United States in December and the FED's string of rate hikes bodes well for those differentials to further widen. Combine the better returns in the US and a generally more favorable dollar outlook with the specter of continued political turmoil within the EU and it seems there is little incentive to hold euros at this point.

Truth be told, the EU was facing some rather significant hurdles long before the double "noes" derailed confidence. Many of these hurdles are associated with expansion. Discontent on the part of established club members with the admission of central European countries in May-04 and general hostilities about the proposed admittance of Turkey played significant roles in the recent referendums. In addition, diverging economic performance, productivity growth, inflation and fiscal performance among member nations are all fodder for further turmoil.

Worthy of particular note is the broad based economic malaise in Italy. Italian consumer product manufacturers are losing their battle with Asia and consequently the trade balance is moving into the red. Unemployment is up, as is the budget deficit. Being part of the euro, and therefore having a relatively high exchange rate, essentially thwarts any effort to compete with Asia on price. Without its own currency, Italy is unable to devalue out of its non-competitive position. Hence, the aforementioned comments by Italian Minister Maroni. Countries such as Portugal and Greece are also in rather dismal economic health. The budget deficit of the former has already reached 7% of GDP.

Many have noted that the EU constitution may be dead, but it's not buried yet. I'm not so sure that I would agree as approval of all 25 member counties is needed for ratification. The initial thought was that any dissent was likely to come from newer or smaller EU countries and that a little economic arm twisting by the likes of France and the Netherlands might encourage them to reconsider. Unquestionably the long standing skepticism of the Brits was going to be an issue. However, rejection of the constitution by two of the founding members of the EU certainly throws a wrench in the works.

I don't believe that we need to worry about the European Monetary Union (EMU) breaking up any time soon. In other words, the euro will continue to be actively traded on the global spot market. A Reuters poll early in June suggested there is only a 5% chance of an EMU collapse within the next 15 years. However, around the same time the German weekly magazine Stern reported that the failure of the EMU was discussed at a meeting attended by German Finance Minister Hans Eichel and Bundesbank President Axel Weber. Having said that, I don't think there is any question that there is a greater risk premium attached to the euro than there was a month ago.

In the months ahead, look for continued political wrangling within the EU. Further bad news is likely to be forthcoming, which should help keep the euro under pressure, creating trading opportunities not only against the dollar, but in the cross rates as well.

Peter Grant is VP of Operations for CFS Capital Management (http://www.cfscap.com), an alternative investment firm in Lakewood, Colorado. This article is an excerpt from our monthly newsletter 'The Alternative' which can be read online at http://www.cfscap.com/news.htm. Emails may be sent to pgrant@cfscap.com

In The News:

Free Guide to Trading Forex during Volatile Times
Sacramento Bee
By City Index Australia The recent falls in commodity currencies, including the Australian dollar, show how volatility in global markets could present trading opportunities for forex traders. For example, the Aussie dollar (AUD) was trading as high as ...
How to Start Trading Forex: Free Beginners GuideNEWS.GNOM.ES (press release)
OPTIONS PLAY: USD INDEX FUTURES TRENDINGInside Futures

all 22 news articles »

Vantage FX UK Launches New Bloomberg TV Campaign
SYS-CON Media (press release)
The adverts are due to air on financial news network Bloomberg and will promote the exceptional level of personal support offered by the London-based Forex trading dealer. In the commercials Mr Berkeley states: "At Vantage FX we strive to deliver a ...

and more »

ZuluTrade's Social Forex Autotrading Platform Now Available to ACFX's Clients
MarketWatch (press release)
NEW YORK, May 23, 2012 (BUSINESS WIRE) -- ZuluTrade.com, the largest automated social Forex trading platform, which enables users to follow successful traders' performance, announced today their partnership with ACFX, the Forex brokerage arm of the ...

and more »

Forex Trading Tips for Investors in the Global Currency Markets
MarketWatch (press release)
SINGAPORE, May 23, 2012 /PRNewswire via COMTEX/ -- Forex Trading offers various benefits from tighter fixed FX spreads to greater leverage and substantial gains from small movements in the market. Foreign exchange (Forex, or FX) is one of the most ...

and more »

China banks report monthly net forex selling in April
Reuters
BEIJING, May 24 (Reuters) - Chinese banks sold more foreign currency than they bought for clients in April, leading to a net sale of $3.7 billion in foreign exchange in over-the-counter transactions, figures from the State Administration of Foreign ...

and more »

Big Players Dominate FX
Traders Magazine
The Bank for International Settlements offers the most comprehensive view into the FX market and comes out with a highly anticipated report every three years. The last Triennial Central Bank Survey came out in December 2010. FX trading represented a $4 ...

Palm Beach Post
FOREX-Euro weak near 2-yr lows on dire German data
Reuters
The euro dropped sharply to $1.25155 on trading platform EBS, its lowest level since July 2010, before recovering to trade at $1.2575 as some investors booked profits on bearish positions initiated earlier. But any rebound was likely to be fleeting and ...
Euro Drubbing Continues; Currency At New 22-Month LowWall Street Journal
Greece remains dominant in currency marketsFX-MM
Skepticism over EU breakthrough hits marketsSeattle Post Intelligencer
Palm Beach Post
all 6,426 news articles »

Euro, Risky Assets Look To Eurozone PMI And German IFO For Direction
TheStreet.com
By Doug Kass The major currencies consolidated in quiet overnight trade as markets digested volatility over the preceding 24 hours before a busy day of European economic data offers new catalysts. The preliminary set of May's Eurozone PMI figures is in ...

and more »

Phones Review
Try a New Approach to Forex Trading With Vantage FX UK
MarketWatch (press release)
LONDON, UNITED KINGDOM, May 21, 2012 (MARKETWIRE via COMTEX) -- For MetaTrader 4 traders seeking the ideal Expert Advisor to automate part or all of their Forex trading process, Vantage FX UK ( http://www.vantagefx.co.uk/ ) has the solution.
GO Markets Achieves Record Gains with Launch of CFDs & Pro Trading AccountsWebWire (press release)
Why MetaTrader is the Best Trading SoftwarePhones Review

all 8 news articles »

Hindu Business Line
Rupee trading at 56.26 against dollar
Hindu Business Line
The rupee opened weak at 56.20 to the dollar in the morning trade on Thursday on continued global risk aversion. The local currency was currently trading at 56.26 against the dollar. The rupee closed at a record low of 56 per US dollar on Wednesday.
Rupee pulls back from record lowLivemint
Rupee still trading above 56 against dollarBusiness Line
Rupee hits 56 against greenbackgulfnews.com
Economic Times -Wall Street Journal
all 745 news articles »

Google News