Ralph Shell @ 2:02 PM, Friday December 10 2010
Early in the week we felt there might be a chance the euro had the possibility of a rally back to the 1.36/37 level. To achieve these goals, it would require resolution of sovereign debt issues, with plans for available funds should Spain ever show at the 'bail me out' window. The week has passed without any solution. Germany claims failure of the euro would mean Europe would fail, and that must be avoided at any price. The trouble is Germany needs to provide a lot of funds, and they are unwilling to pay the price.
Earlier this week, David March at Market Watch had an interview with Helmut Schmidt, the aging German leader who was a force in creation of the euro. Here are some excerpts from that interview entitled: "The political vacuum at the heart of the euro... Schmidt asks, Does Europe have the will it needs?
Yet, as Helmut Schmidt points out in an exclusive interview, during the deep crisis besetting the furthest-reaching scheme for European integration since the Second World War, the politicians who should be shoring up the euro have proven lamentably ineffectual.
As Schmidt says, the only helmsman to emerge with any credit is Jean-Claude Trichet, president of the European Central Bank, who is using the ECB’s firepower and his own crisis-fighting skills to fight a rear-guard action against the markets. And yet Trichet retires in less than 11 months — leaving a vacuum at the heart of Europe.
Schmidt now says — more in sadness than in anger — that the euro’s founders made a mistake when it started in 1999 by allowing in the peripheral countries, and by not imposing binding rules on government finances."
It seems like the Germans want the best of two worlds. The peripheral countries in the euro have debt issues posing problems for their economies, and this has the effect of weakening the euro. As leading exporters of sophisticated manufactured goods, the Germans are the beneficiaries of a weaker currency. In a sense, the euro has priced itself at a discount to the efficient German economy, reflecting in part the value of the less competitive PIIGS.
Upon entry into the euro, the peripheral countries had access to ample and cheap credit, to purchase, often from the Germans, a variety of consumer products that enhanced their life style. Cheaper credit also enabled Greece and other countries to borrow to pay for their expensive, bloated bureaucracy. The financial crises of 2008 changed this, leaving the weaker countries swimming in sovereign and consumer debt. Moving these debt obligations, to the public sector as Ireland did, resulted in an expensive bail out. Germany was hit for a portion of the bail out, but other countries also had to share the burden.
The list of the needy borrowers is lengthy. Bailing them out is a costly raid on the German Treasury, but cutting the PIIGS loose from the euro might be even worse. The fiscally responsible members remaining in the euro, would enjoy the benefits of a stronger euro, namely a lot cheaper flow of imported goods and services. The trade off though, would be a much higher euro, a big handicap for the German exporters.
It is easy for Schmidt to deplore the lack of current leadership, but what would he do? There is not an easy solution to the plight of the euro. Yes there is a lot of money and political energy invested in the euro, but the power of compound interest is a silent killer that will only hasten default day for the poorer nations paying the higher rates.
Sometimes it helps to take a longer view of the markets, a luxury not always enjoyed when trading highly leveraged forex positions. The EUR/USD weekly chart is interesting. The inability of the pair to trade above last week's 1.3422 is negative, suggesting the relief rally is over. Also, please note, we are getting a downside crossover of the MACD. Recent crossovers July 2010, and December of 2009 were excellent signals. This pair looks like it should be sold, an eventual move toward 1.26 would not be out of the question.
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.