The celebration following the resolution of the Irish Banking crises was brief. The euro rallied versus the USD, gaped to a spike high of 1.3784, and then turned south, quickly filling this morning's gap. Euro critics, acknowledged the Irish agreement was a good thing, but dourly reminded the celebrators that Portugal, and perhaps Spain would shortly need help.
In The Telegraph this morning Ambrose Evans-Pritchard observed:
"Europe’s leaders, who comfort themselves that Greece is a special case because it cheated, and that Ireland is a special case because it allowed its "Anglo-Saxon" banks to go berserk. They have yet to acknowledge the deeper truth that monetary union has insidiously destabilised much of Europe and trapped a ring of largely innocent countries in depression.
So with some trepidation, let me point out that Portugal will have a current account deficit of 10.3pc of GDP this year, 8.8pc in 2011, and 8.0pc in 2012, according to the OECD. That is to say, Portugal will be unable to pay its way in the world by a huge margin even after draconian austerity.
The IMF also says Portugal has the eurozone’s most rigid labour markets, and that social transfer costs have risen to 22pc of GDP from 18.5pc in 2005. Productivity is stuck at 64pc of the eurozone average, unchanged since the early 1990s."
Will a rescue for Portugal be next? Is Spain, with the economy that is too big to rescue next? Will Germany and the other contributors be willing to continue filling the coffers of the less efficient euro members?
In a Market Watch commentary this morning entitled The Coming Euro Split, David March explained how he thinks this might happen:
"that sometime in the not-too-distant future the single currency in its present form may come to an end.
Not that the euro will simply cease to exist from one day to the next.
It is more likely that fragmentation will take place between a hard core
and a less-hard periphery. Exactly how, and when, that happens remains
uncertain. But I predict that, by 2011-12, economic and monetary union
(EMU) as we have known it in Europe since 1999 will be significantly
different to what it is today.
We will see, sooner or later, the birth of two disparate twins. A lower
valued “Euro-South” and a more expensive Euro-North “(or a “Debtor €”
and a “Creditor €”). The Mediterranean members and other fringe
countries will be in the first category, the solid, low-inflation
nations around Germany will be in the second."
With the future of the euro threatened by problems that may cause it's demise in the present form, today's sell off in the euro, and probably the pound but for different reasons, is justified. Markets put a big discount on the unknown, and this will hurt the euro. Even if the Germans are going to be supportive of more bail outs, this will result in a larger supply of euros not a reason for euro support. Eventually the Germans will be forced to make a decision. Is it better to subsidize the single currency, making it easier to export into the euro market, or is the price of the bail outs too high?
The British bankers do have serious entanglements with the Irish banks, not a situation that will help the pound. Further, according to the COT report the pound remains a favorite long of the big specs. In the latest report the large specs held 42.7% of the total OI, while only short 19.6% of the total. The pound is currently trading at 1.59, down from the 162.97. The sell off in the euro has been sharper, but we suspect the British banks are also involved in some of the troublesome debt in Southern Europe.
Despite pending problems in the US, these may not be as serious nor as imminent as those confronting both Europe and Britain. For these reason we think trading the short side of the euro and the pound is the right side of the market, but we are cautious because of the short trading week. Short volatile weeks, however, can give you opportunity if you are patient and know which way you want to trade.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.