Diary of a Financier

Euro at Another Junction & the Curious Tale of Austerity/Inflation

In Capital Markets on Thu 7 Apr 2011 at 09:29
  • EURUSD just surpassed its double top at $1.42.
  • LT charts are at a junction where the next moves will confirm or deny a bull breakout.
  • EURUSD will falter eventually since ECB rate hike < sovereign struggles, but I expect a continuation of this rally toward $1.50.
  • Because of its half-baked monetary union, the EU should’ve chosen inflation and the US austerity, but the opposite happened.

On the heels of my entry at the end of March, the Euro (EURUSD) has surpassed its short-term resistance & double top at $1.42.  With Portugal having capitulated yesterday by asking for an EU bailout, I find the sovereign debt woes still starkly juxtaposed with the pending rate hike by the ECB.  The EURUSD is as strong as anyone could imagine it being–despite the turmoil–but policymakers continue to govern in the interest of the EU’s brass, namely Germany.  Did I mention that Germany’s printing record-low unemployment and record-high export numbers?  Ireland’s need for a devalued currency is apparently trumped by Germany’s want to cool-off its economy.  It’s the developed world’s version of indentured servitude.

To the charts!

EURUSD monthly- while the stochastic has broken its resistance and waded into overbought territory, the MACD sorely lags and the actual price-action sits on trendline resistance. Overall a neutral LT picture with a bearish tilt until it can test the $1.50 resistance.

EURUSD weekly- MACD flashed bullish divergence, but it failed to confirm a bull trend in 2010. Now that we have a breakout from the $1.42 double top, MACD has a second chance to confirm that bull.

EURUSD daily- an undenyable bull tear since January 2011. The price rests at that same overarching bear trendline started in 08/2008. While the Stochastic is overbought, the signal doesn’t mean much in such a strong bull trend. MACD shows momentum lagging again, which is a concern after the bearish divergence it flashed in 11/2010.

Short-term, I see enough to expect a EURUSD extended rally toward $1.50.  Longer-term, the charts give me little tradeable evidence beyond a bearish tilt, but the fundamentals seem a bit more conclusive.  An ECB rate hike might cool-off an overheating Germany, which contributed 20% of the EU’s nominal GDP as of 2010.  Yet, the trump is that Germany will end up holding the bag when Ireland, Portugal & Greece come back for more.  (Spain says it’s fine, Italy too.  No comment.)

To me, the US should’ve chosen a path more biased toward austerity; specifically, failures and bankruptcies needed to happen here.  The zombie approach passes the burden onto subsequent generations, instead of our generation taking responsibility for unwinding its excesses.  It’s like that house your grandfather leaves you in his estate, except it comes with a heavy tax bill or debt burden.  American policymakers chose to paper over the leaks with stimulus, however, so I’ll support their follow-through–by whatever effective, prudent means they may.

The difference in Europe is that they just should’ve never engaged in a half-baked monetary union.  You now have the economically viable members preying on the invalids who lack the autonomy to mend.  In a full-fledged currency union, Germany shouldn’t have the political autonomy to feign indifference while Ireland rots.  That’s after a decade of the Euro being managed with accommodative dovishness for Germany’s benefit (exports) & Ireland’s detriment (cheap borrowing to inflate the housing bubble).  To what end?

Well, I’m sure the US & EU will continue to pursue these means, so as to not render useless 18 months worth of resource-drain & conviction in their chosen path.  The Fed will continue its dovish habit, the ECB its austere inkling.  But this year, conditions will become so extreme that central banks will rebuke, reverse & retrace.  The ECB will lead the charge.  Then, the great unwind; it will challenge all that’s become conventional wisdom–the USD demise, the precious metal rise, and the commodity complex.

(I’m not an experienced CDS trader, but I know the market for sovereign CDS has grown remarkably liquid and that German CDS are priced quite cheaply: compare German CDS at 37bps to Portuguese at 554bps to Greek at 1010bps… considering Germany is the lender of last resort.)

No prescience here, but I’m reading Barton Biggs’ Wealth, War & Wisdom as we speak, wherein the author notes something to the effect of, ‘Not a generation of Europeans has come and gone without a magnanimous strife within the Eurozone.’  Maybe in our age of “diplomacy,” this generation of Europeans will bear the wounds of economic warfare?


  1. […] another 18 pips to 1.4478 today, the Euro (EURUSD) is reacting in support of my most recent outlook.  It ends the week hooked onto the snag around $1.45, which was the last uptick in January 2010 […]

  2. […] 4/7- German 5-year CDS @ 37bps underpriced; now 53bps. […]


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