It’s almost the end of the year and quite frankly, things are shaping up to look like they did a year ago. Let’s take a look at what was happening then and see if we can gain some insight as to what may happen this time around.
Back in November 2010, the major news circulating the airwaves was talks about an Irish bailout. Ireland was eventually given a bailout amounting to about 80 billion EUR. Soon after, the focus shifted to Portugal and Spain as the next potential candidates for a bailout and European officials began to fear that contagion would creep into the markets.
Fast forward to today, and it appears that all of their worst fears have come true. As we now know, Portugal was granted a bailout, while Greece – the first member of the euro zone to request financial aid – had to ask for another set of funds. Italy also took its turn on center stage when Italian bond yields soared to record highs.
Furthermore, not much progress has been made on the EFSF, as ECB and euro zone government officials have butted heads as to who should be the one to step up their game.
What’s worse is that contagion has spread to the rest of Europe. France has been hit with warnings from Fitch and Moody’s that its precious triple AAA rating may be cut, while last week’s German bund auction disappointed the markets. This goes to show that not even stronger European economies like Germany and France are free from the negative effects of this debt crisis.
In addition, the on-going crisis continues to weigh down the euro, just like it did late last year.
EUR/USD: Last year
As you can see, we saw similar drops in EUR/USD during the month of November in both 2010 and 2011. One thing to note is that we saw the pair range in December, before rallying higher to start 2011. With European officials showing a more coordinated effort, bond yields dropped and risk appetite picked up, allowing EUR/USD to rally higher.
Could we see a similar rebound over the next couple of months?
On one hand, if some progress is made between ECB and European governments and a Eurobond program is introduced into the markets, market participants may take this as a step in the right direction. This could help alleviate some of the uncertainty in the markets and allow the euro to regain some of its recent losses.
On the other hand, if Germany refuses to give in and if France gets slapped with a credit downgrade, all hell may break loose and send EUR/USD back to the 1.2000 level.
For now, all we can do is be cautious and remain focused. Any one event may trigger a reversal or a continuation of the recent trend, so make sure you stay on top of your game, practice good risk management skills, and be prepared for anything!