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.
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.