Euro zone: the Good, the Bad, and the Ugly

It had been so easy to think that the shared currency had already overcome its debt woes. Too easy. For the past two weeks, EURUSD had been on a hot bull rally, posting fresh monthly highs and breaking above the 200 SMA on the daily chart. However, it stopped short of successfully trading past the 1.3400 handle yesterday as the ghost of structural problems resurface to haunt it.

If you still don’t have a clue why the euro has been rallying lately, well, you’ve probably been living under a rock. Just this week, three little pigs – oops, I mean three out of the five PIIGS countries – held their bond auctions to fund their fiscal deficits. Even though there were plenty of naysayers predicting that the event would be a flop and that Ireland, Spain, and Greece would eventually need a bailout, the auctions turned out to be a success. Phew!

In fact, Ireland was able to raise 1.5 billion EUR from these bond auctions while Spain and Greece sold 7 billion EUR and 390 million EUR worth of their securities respectively. These revenues for the bond auctions were much higher than expected, suggesting that investors haven’t lost all hope for these debt-ridden nations. After all, the governments of these nations promised that they’d put more effort in cutting spending, boosting tax revenues, and pulling their countries out of debt.

Ahh, it seems like the sun is shining brightly on the euro zone. But can the good times last? As the cliché goes, all good things come to an end.

pigs.png

While austerity measures and tax hikes bode well for the government coffers, their effect on the economy is quite the opposite – a fact that we seem to have forgotten. Thankfully (or maybe not), data comes out every once in a while to remind us.

Earlier this week, Ireland, the first country among the PIIGS that implemented austerity measures, released a report showing that its economy shrank by 1.2% in the second quarter. The result was quite a surprise to everyone, as people initially expected a positive figure.

Then, Prime Minister George Papandreou mentioned in a speech two days ago that it would take two years before Greece’s economy returns to stable growth. He also predicted that Greece’s economy could shrink by as much as 4% this year.

Heck! Even Germany, euro zone’s last shining beacon of hope, isn’t looking too bright anymore. Yesterday, the country’s manufacturing purchasing managers’ index printed a reading of 55.3, lower than consensus, and down from the August’s reading of 58.2.

It seems to me that Alicia Keys hit the nail on the head with Karma in which she said, “What goes up must come down.” It’s a good jam to listen to as we watch the euro fall into this hope-to-disappointment cycle in the coming days with one news report after another.

With all the optimism going around, it’s easy to get married to a position and forget that euro zone is facing hard times ahead. Euro zone is still stuck in a ditch, and it will take some time before it is able to crawl out.

Always remember that the market is unpredictable, which means that the Kool Aid that everyone’s been has been running on could run out at any moment. When that happens, we must be able to re-evaluate and adjust our position accordingly.


  • PhilNield

    Love the title for the post … Sums up the roller coaster ride that is the Euro.

    There was certainly some disappointing data emanating from the Euro zone today.

    Now Portugal’s opposition party have said they would refuse to hammer out an early belt-tightening budget. Another body blow to the Euro.

    Also weighing down on the Euro today was a very weak GDP Q2 figure from Ireland, which revealed that the economy shrank by 1.2% on the quarter. Most analysts had predicted positive growth.

    Questions are certainly being raised over the euro’s recent gains from the disgruntled speculators who had wanted to get away from the low-yielding dollar in the pursuit of a more profitable euro strategy.

    As you quite rightly said “What goes up, must come down.”

    Thanks for the post.

    Phil Nield

    PS Really liked your post so I’ve put a link on my blog for my readers to pop over and take a read.

    http://forextradingstrategies-phil.com/forex-trading-strategies-news-friday-24th-september-2010/

  • PhilNield

    Love the title for the post … Sums up the roller coaster ride that is the Euro.

    There was certainly some disappointing data emanating from the Euro zone today.

    Now Portugal’s opposition party have said they would refuse to hammer out an early belt-tightening budget. Another body blow to the Euro.

    Also weighing down on the Euro today was a very weak GDP Q2 figure from Ireland, which revealed that the economy shrank by 1.2% on the quarter. Most analysts had predicted positive growth.

    Questions are certainly being raised over the euro’s recent gains from the disgruntled speculators who had wanted to get away from the low-yielding dollar in the pursuit of a more profitable euro strategy.

    As you quite rightly said “What goes up, must come down.”

    Thanks for the post.

    Phil Nield

    PS Really liked your post so I’ve put a link on my blog for my readers to pop over and take a read.

    http://forextradingstrategies-phil.com/forex-trading-strategies-news-friday-24th-september-2010/

  • dgouveia

    Well Portugal’s opposition party didn’t said that. All he said was that I wouldn’t agree with another increase in taxes and so the Prime Minister should find another way like cutting the public spending.

    I really hope that the euro come down a little bit otherwise I’m in trouble :o)

  • dgouveia

    Well Portugal’s opposition party didn’t said that. All he said was that I wouldn’t agree with another increase in taxes and so the Prime Minister should find another way like cutting the public spending.

    I really hope that the euro come down a little bit otherwise I’m in trouble :o)

  • personalme

    Remember that not just the bond auction success which made euro got the rally but also US is planning to hold second part of QE. Thus we see a temporary rally. The problem now is not buying the good one and selling the bad one but choosing which one is better between those bad currencies.

    Yes the auction has been oversubscribed… but with new record rate. The problem is far from over. The growth is still negative and debt contagion is still there.

    All we need is a trigger to bring the momma bear out from the cave and hug mr euro. At that time, I’m probably selling euro, selling pound and maybe selling dollar either.

    And buying Aussie, CAD or Swissy imho

  • personalme

    Remember that not just the bond auction success which made euro got the rally but also US is planning to hold second part of QE. Thus we see a temporary rally. The problem now is not buying the good one and selling the bad one but choosing which one is better between those bad currencies.

    Yes the auction has been oversubscribed… but with new record rate. The problem is far from over. The growth is still negative and debt contagion is still there.

    All we need is a trigger to bring the momma bear out from the cave and hug mr euro. At that time, I’m probably selling euro, selling pound and maybe selling dollar either.

    And buying Aussie, CAD or Swissy imho