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In this regard, the fact that the EU economy expanded in — buoyed by a cheap currency and loose monetary policy — should certainly be reflected in a stronger stock prices. Default is now rapidly on course to becoming a self-fulfilling prophecy, as fleeing investors cause yields to rise and credit ratings to fall, further scaring away more investors. To be fair, some analysts continue to insist that it is better to think of the sovereign debt problems as a crisis of credit, rather than of currency.
In addition, the Euro finished on a high note, formally welcoming Estonia into the fold. Given all of the bad news in , that might just be cause for optimism. Only last month, the Euro was on top of the forex markets.
In the last few weeks, however, the EU sovereign debt crisis resurfaced, and the Euro has plunged, losing 7. As a result, investors have pulled an about-face: In the last week, there were a handful of developments. Naturally, rumors began to circulate that Portugal was also preparing a formal bailout request. Interest in its most recent bond issue was healthy, but at the highest interest rate since the Euro was introduced in and more than. Ultimately, bailouts of Greece, Ireland, and Portugal can be managed.
As a result, interest rates in its bonds have surged to a post-Euro high relative to German bonds , and credit default swap spreads which insure against the risk of default have risen substantially. The problem with the EU sovereign debt crisis — like most credit crises, for that matter — is that they tend to be self-fulfilling. As investors begin to doubt the ability of institutions governmental and otherwise to service their debts, they naturally demand greater compensation for the perceived increase in risk.
It is ironic on multiple levels then that even as investors abandon the debt of EU member countries, they are hoping that the ECB steps in to fill the void they create. Nowadays, the Euro rallies only on news that the ECB is maintaining or expanding its intervention.
Based on this change in investor mentality, it seems unlikely that the Euro will recover its losses anytime soon. Of course, the ECB has nearly unlimited resources at its disposal. There are still plenty of optimists who believe that the fear will soon die down and that higher interest rates will attract some of the yield-hungry investors that are currently focused on emerging markets. I think the most realistic assessment is somewhere in between.
On the one hand, it seems unlikely that the Spain will default on its debt at anytime in the near future or that the Euro will cease to exist. On the other hand, the fact that investors now see the ECB as a savior for following in the footsteps of the Fed implies that there is no reason for investors to buy the Euro against the US Dollar.
As long as housing prices continue to fall, these losses cannot be capped. Given that both countries are struggling economically, it is possible that austerity measures and budget cuts could backfire and worsen their respective fiscal situations.
Like their Irish counterparts, Portuguese banks remain heavily reliant on access to cheap ECB credit in order to function. Currently, their governments insist that they can get by without help from the European Commission.
To be fair, they have managed both to issue new debt and refinance existing debt without serious difficulty. In addition, Ireland and Portugal have modest reserve funds which could tide them over for close to a year, if need be. The medium-term, however, looks less rosy. If rising bond yields are any indication, these countries could be in serious trouble.
Bond investors are not concerned about an EU bailout, which is seen as inevitable, at least for Ireland. Rather, investors are concerned that they will be asked to take part in the bailout. Given that Germany is fiscally sound, it has pretty much nothing to lose short of a breakup of the Euro by playing hardball. In fact, it may actually benefit from scaring away investors , since a weaker Euro will strengthen its export sector.
Going forward, it seems safe to say that the Euro correction will continue, as investors continue to reevaluate their exposure to sovereign credit risk. Against other currencies, however, the Euro will probably decline: During the throes of the Eurozone Sovereign debt crisis, it seemed as if the Euro was headed back towards parity, if it even remained in existence!
Besides, it looks like all of the austerity measures will be undone after the next election cycle. As evidence that bond investors remain skeptical, consider that Greek debt still trades at a basis point premium to German bonds. Even ignoring the fiscal problems of the EU, the economic picture is not pretty.
Through its quantitative easing program, the ECB has injected hundreds of billions of Euros into the banking system and credit markets.
This is not the position of the Governing Council, with an overwhelming majority. This non-standard measure…was designed to help restore a more normal functioning of our monetary policy transmission mechanism. On the other hand, the ECB is sterilizing all of its market intervention, which means that most of the funds that it is injected into the economy will remain in the EU. In addition, Eurozone inflation currently exceeds US inflation at a year low , which means that the ECB will hesitate before following the Fed in easing monetary policy further.
However, this seems a little too much like the tail wagging the dog, since until QE2 is officially implemented, all anticipatory shifts in capital flows are purely speculative — not fundamental. And as a fundamental analyst, that concerns me. According to the most recent Commitment of Traders report , investors are building up long positions in the Euro, to the point that trading is becoming lopsided.
It dove during the financial crisis, only to surge during the apparent recovery phase, fell during the sovereign debt crisis, and rose during the paradigm shift , then fell as risk appetite waned, only to rise again in September, en route to a 5-month high.
Of course that could change tomorrow or even 5 minutes from now! Never mind how ironic it is, that growth in the EU is projected at 1. All that matters is compared to the Dollar and Yen, Pound, Franc to a lesser extent the Euro is perceived as the currency of risk.
Basically, Central Banks around the world are now competing with each other to devalue their currencies. In contrast, the European Central Bank ECB has decided to remain on the sidelines in favor of fiscal austerity , which is forcing the Euro up or rather all other currencies down. Federal Reserve indicated this summer that it may ease monetary policy further… often seen as printing money to pump up the economy.
After all, most Euro members will reduce their budget deficits in and auctions of new bonds are once again oversubscribed. On the other hand, interest rates for the PIGS Portugal, Italy, Greece, and Spain have risen to multi-year highs , as investors are finally trying to make a serious effort at pricing the possibility of default. When this program expires in less than three years, the fiscal problems of Greece and the other PIGS will be exposed once again, and a new stopgap solution will need to be proposed.
Currency devaluation is impossible. Sovereign default is being prevented. That leaves wage cuts and increased productivity as the only two paths to equilibrium. The former could be accomplished through inflation, but the ECB seems reluctant to allow this to happen.
For now, then, the Euro is probably safe, and may even thrive. Short positions in the Euro are being unwound with furious speed and data indicate that there is still plenty of scope for further unwinding. Is it possible that the Euro rally was too good to be true, or is this correction only temporary? Earlier this week, Adam reported that China via the institution that manages its foreign exchange reserves was at least partially responsible for the Euro rally.
However, if this is indeed the start of a U-Turn, hindsight might show that it was inevitable that it would occur at this level. As an aside, the kinds of back-and-forth swings that have become commonplace in forex markets may be attributable to large-scale investors, such as Central Banks.
As currencies or other securities, for that matter decline, investors will often take advantage of low prices and enter the market. When prices rise, these same investors joined by long-term investors will often take profits and sell. As a result, it is hard for currencies to rally continuously without any kind of correction. Back to the Euro, there are a handful of Central Banks who are making their presence known on this front.
Oddly, it waited until Euros were cheap before it started selling. Analysts from Morgan Stanley foresees a similar trend: They have prevented the euro from depreciating more rapidly… but they are unlikely to stop its depreciation.
In fact, the kinds of back-and-forth swings that have become commonplace in forex markets may be attributable to large-scale investors, such as Central Banks. Only a small portion of this actually represents meaningful changes in portfolio allocation. Thus, market participants especially amateurs are advised to watch these market movers for signs of changes in their respective portfolios, because they will often signal the direction of the market.
The truth is probably that the two trends reinforced each other. Given that Central Bank reserves are once again rising, any changes in portfolio allocation could have significant implications for the forex markets. I concluded my last post Euro Recovery: Two days later, I think I can offer an explanation: The force behind the sudden sea change might not be private investors, which up until the spike entrenched itself as a full-fledged connection, remained firmly behind the declining Euro.
Instead, it seems quite reasonable that China — via its sovereign wealth fund, which is charged with investing its foreign exchange reserves — might be the responsible party.
That China is buoying the Euro would make sense on a couple fronts. First of all, it would explain the mysterious silence behind the rally. China is naturally secretive in pretty much everything it does, especially in the way it conducts currency policy and manages its forex reserves.
More importantly, that China is responsible also makes sense from a strategic standpoint. China has long spoken about its intentions to change the allocation of its forex reserve holdings, and in hindsight, its timing was perfect. In the beginning of June, the Euro stood at a multi-year low, and the price of US Treasury Bonds stood at a multi-year high.
Moreover, China can achieve this diversification without influencing the value of the Yuan, since Dollars can be exchanged directly for Yen and Euros.
That is important, since the RMB is still effectively pegged to the Dollar. On a trade-weighted basis, it has actually fallen. Pressure continues to mount on China to allow the RMB to appreciate. Due to pressure from China, however, it removed precise figures on the recommended extent of said revaluation. Instead, it has announced that it will make a more sincere effort to tie the Yuan to a basket of currencies, rather than just the Dollar. Going forward, then, the Yuan will probably remain basically stable against the Dollar.
As China moves towards a trade-weighted peg, however, it is conceivable that it will continue to buy Euros and Yen, for spite against the Dollar. As this could have a confounding effect on currency markets, traders should plan accordingly. In early July, when the Euro rally was in hindsight just getting under way, I reported on the apparent paradigm shift in forex markets , whereby risk-driven trades that benefited the Dollar were giving way to trades driven by fundamentals, which could conceivably favor the Euro.
Or so it would seem. Euro fundamentals are indeed improving, with an improvement in the German IFO Index, which measures business sentiment, seen as a harbinger for recovery in the entire Eurozone economy.
To be sure, Spain and Italy, two of the weakest members, registered positive growth in the most recent quarter. Contrast that with the situation across the Atlantic, where a growing body of analysts is calling for a double-dip recession with a side of deflation.
The Fed has certainly embraced this possibility, and seems set to further entrench — if not expand — its quantitative easing program at its meeting next week. As a result, shorting the Dollar as part of a carry trade strategy is back in vogue.
The last time I remember it being this hard was in to In fact, you can recall that many hedge fund managers referred to shorting the Euro as the trade of the decade. The latter is supported by volatility levels which are gradually falling. Still, something smells fishy. A rally in the Euro only a few months after analysts were predicting its breakup is hard to fathom, even in these uncertain times.
To borrow his terminology, a stink bomb is probably inevitable. The only question is where the stink bomb will explode: It sounds like the setup for a Jerry Seinfeld joke, and given the way the tests were viewed by the markets, it might as well have been.
According to the EU, the tests were a tremendous success. According to investors, the results were irrelevant at best, and patently misleading at worst. The stress tests were first proposed last month as a way to gauge the health of the EU banking sector; it was hoped that the results would demonstrate the soundness of the banking system and mollify investors. Since then, momentum continued to build in the markets, as investors engaged in meta-speculation about the potential impact of the stress tests.
In the days leading up to the test, there was a mixture of apprehension and uncertainty. A great deal of caution should be exercised…as the results of the stress tests are made public. There is definitely the potential for a huge swing in either direction…as there could be a freight train coming down the tracks.
On Monday, the tests were finally conducted: Regulators tested portfolios of sovereign five-year bonds, assuming a loss of When the news was initially released, the Euro sea-sawed — first rising, then falling — and analysts rushed to ascribe sometimes-contradicting sentiments. First of all, investors saw the tests for the charade that they essentially were. The only reason that EU regulators were willing to conduct them publicly was because they knew that the results would be positive. On a related note, the tests were not nearly strict enough: Ultimately, gauging the success of the stress tests will require waiting few weeks.
Unlike currency, stock, and bond markets — which can and did offer instant feedback on the news — it will probably take some time before the impact is fully reflected in the money markets. In other words, while an uptick in the Euro, shares of bank stocks, and sovereign bond prices should all be seen as symbols of confidence, the real test is whether investors will be willing to lend directly to banks, at reasonable rates proxied by 3-month Euro LIBOR, on display below.
In fact, that test could come quite soon, as the ECB continues to recall the hundreds of Billions of Euros in loans that it made to commercial banks. If LIBOR rates remain steady and the markets remain liquid, then the stress tests can be called a success. The arguments in favor of the former are pretty strong. From this standpoint, what we have seen unfold over the last month-and-a-half is a classic short squeeze. Basically, those who were short the Euro were forced to cover their positions when it started to rally, which in turn triggered more selling, and ultimately, a self-fulfilling rally.
Due to its sudden rise, the Euro became a much less attractive funding currency for carry traders. In addition, the markets have started to turn their attention to economic fundamentals in the US, which had been edging out the Euro in one of the perennially important rivalries in currency markets. In short, it suddenly became obvious to traders that the economic and fiscal conditions in the US are at best equal to those in the EU.
Finally, there was an implicit acknowledgement among the EU leadership that the so-called sovereign debt crisis is actually in many ways a banking crisis. Unfortunately, investors are skeptical that the stress tests will be stringent enough, seeing them as a mere publicity stunt: As you can see from the chart above , time is quickly running out.
Since the inception of the financial crisis, the Dollar has been treated as a safe haven currency. Simply, when there was a surge in the level of risk-aversion, the Dollar rose proportionally. When risk aversion gave way to risk appetite, the Dollar fell. It was as simple as that.
In fact, a carry trading strategy has unfolded along these lines and made this phenomenon self-fulfilling: In recent weeks, this approach appears to be changing. It started with the US stock market, which began to decline, even as the Dollar was still rising. Investors had started to worry about the housing market stalling, the exhaustion of the government stimulus effect, and worst of all, the possibility of a double-dip recession.
GDP numbers came after some weaker-than-expected housing numbers and a dovish Federal Reserve, all of which drove U. Treasury yields lower and prompted investors to reassess their dollar positions. From my point of view, it is not the possibility of a prolonged recession that is itself noteworthy though this is surely cause for concern , but rather that the currency markets are paying attention it.
To be sure, news of the EU sovereign debt crisis continues to dominate headlines and influence investor psychology. It would seem that until there is some resolution to the sovereign debt crisis whether positive or negative , an air of uncertainty will continue to hang over the Euro such that it remains an apt funding currency for a carry trade strategy. On the other side are those who argue that the US will shed its safe-haven status and become a growth currency.
Japan will only emerge slowly from deflation and the U. If the US is indeed able to put the recession behind it, then a renewed focus on growth fundamentals would send the Dollar higher. If the Double-Dip materializes, however, Dollar bulls will probably find themselves hoping that the Dollar can retain its safe haven status.
You might be tempted to argue: In the end, a good investor will always have a longer time horizon than a good currency trader. In short, someone who bought shares in Apple 20 years ago is now probably a millionaire. Someone who went long the USD 20 years ago has probably since lost his investment due to inflation. But seriously , currency traders must adapt to the zero-sum nature of forex markets by shortening their time horizon.
Stock market investors, on the other hand, are not bound by this constraint. In fact, by holding stocks for a long enough time period, investors can actually turn this into an advantage.
As a result of the Eurozone sovereign debt crisis, for example, some analysts are calling for foreign i. This recommendation is not necessarily a dismissal of European companies though an argument could be made on this basis as well , but rather is a reflection of concerns that returns will be negatively impacted by the declining Euro. Since foreigners can only purchase shares using their home currencies indirectly through ADRs and ETFs , they feel the effects of currency fluctuations every time they enter and exit a position.
But therein lies the problem with this approach. Those that dump their shares now solely over exchange rate concerns are simply locking in their losses, just like American stock market investors who sold their stocks in March when the DJIA was below 7, By instead waiting a year or longer! The concern is that the Euro will continue to decline, perhaps to the point of breakup. Based on history, however, there is very little reason to believe that will be the case.
Since its introduction 10 years ago, the Euro has fallen, then risen, then fallen, then risen, then fallen again to its current level. If you initially invested in Europe 2 years ago, the exchange rate would erode your returns if you tried to sell now. If you invested 5 years ago, you would break even.
If you invested 10 years ago, you would come out ahead. Still, if you maintain your positions for long enough, either you will break-even from the exchange rate or it will only marginally affect your returns on an annualized basis. Consider also that you can hedge your exposure to a falling Euro by simply buying Dollars. If you are concerned about exchange rate risk, you can do this every time you open a position. For example, if you were to buy European shares today and simultaneously short an equal quantity of Euros, you would be perfectly hedged against any further decline in the Euro.
The cost of the hedge is the sum of any transaction costs, management fees, and negative carry that you incur as part of the currency trade. If your investing horizon is long enough, their fluctuations will neither help nor hurt you in a meaningful way. Something incredible has happened: The Euro has reversed is While financial journalists have interpreted this as a recovery in risk appetite, and mainstream investors dismiss all of it as mundane fluctuations in exchange rates, currency traders — both fundamental and technical — know better.
They know that this rally is merely a correction, the product of the Euro falling too much too fast against the Dollar and a consequent short-squeeze. They know that there is nothing underpinning the Euro rally, and that since the bad news continues to emanate from the Eurozone, a further decline is inevitable.
From a fundamental standpoint, the last two weeks have brought further indications that the crisis is still mounting. Meanwhile, Spain managed a successful debt auction, but at interest rates nearly 1. The implications for currency markets are clear enough: Politicians, for their part, are still struggling to convince investors that they are serious about trimming their budgets and uniting for the sake of the Euro.
Even putting politics and economics aside, there is a force that will continue to punish the Euro regardless of what happens: That is important because it means there may be structural reasons in the investment world why any lift in the euro will simply be quashed. At this point, then, the only issue is when the Euro will resume its decline.
The Euro has now declined for six consecutive months against the Dollar. Since the last time I reported on the Euro, the bad news has continued to pour in.
Spain officially lost its AAA credit rating , and concerns are mounting that the crisis is spreading to Hungary not even on the radar screen last week and Italy: Germany appears to be isolating itself from the rest of the EU, thanks to its ban on the short-selling of certain financial movements- a move that was not matched by other member states.
The main issue, which critics of the bailout have been quick to point out all along, is that the fiscal problems that precipitated the crisis are still extant. If a full-blown crisis is to be avoided, significant structural reforms will have to implemented, and soon. The last time the ECB intervened was in , shortly after the Euro was introduced and when it was trading around 87 cents to the Dollar.
Experts are divided over whether intervention is likely or even possible. Any intervention would necessarily involve the Fed and the other important Central Banks of the world. This makes it favorable for investors to bet against the Euro, and is starting to earn the ECB the ire of EU politicians and economic policymakers. The fiscal crisis ravaging the Euro and the Pound has sent the Dollar skyward.
On the one hand, the prospect of continued uncertainty and dissolution of the Euro would seem to be an excellent harbinger for continued appreciation in the Dollar. Unlike during the last few years, analysts are no longer talking about forex reserve diversification. It was once widely predicted that the Euro would rival the Dollar for a place in the portfolios of foreign Central Banks.
As expected, preferences are now shifting back in favor of the Dollar and to a lesser extent, the Yen. Over the short-term, however, Central Banks and investors will continue to eschew the Euro, if only due to sheer uncertainty. Given that everything is relative in forex, investors and Central Banks only have so many options when it comes to choosing which currencies in which to denominate their portfolios. Due to extremely low short-term interest rates, most investors have been willing to accept low returns when lending to the US by buying Treasury Securities, and indirectly by simply holding Dollars.
My suspicion is that investors will demand higher yields in exchange for lending to the US. Just like with Greece, a US fiscal crisis would probably emerge suddenly. While the US government pays lip service to the notion of balancing its budget and reducing its sovereign debt, even the most optimistic projections show a budget deficit for the next 10 years.
In short, the only hope is for the US economy to grow faster than the national debt. This is not new information. Doomsday theorists have been predicting the bankruptcy of the US for two centuries. Then again, forex is relative.
Some analysts have suggested that the new reserve currency will be gold, oil, and other commodities. Under the current system, then, investors are pretty much stuck with the Dollar. At this point, betting to the contrary is tantamount to betting on the complete collapse of the modern financial system. A reasonable bet, perhaps, but you can forgive investors for being hesitant to embrace it.
In my last post , I reported that the markets were incredibly bearish on the Euro, due to concerns that the Greek debt crisis could neither be mitigated nor contained. By following up on this report with another incantation of Euro bearishness, I certainly run the risk of belaboring the point.
In addition, the European Central Bank ECB has agreed to purchase an indeterminate amount of government and corporate bonds, while other Central Banks will use currency swaps to ease pressure on the Euro. The reaction to the news was quite positive, with the Euro reversing its 6-month slump and rallying 2. Equity shares surged on the news: The celebration was short-lived, and by Tuesday yesterday , the Euro had already returned to its pre-bailout level against the Dollar.
In hindsight, it looks like the rally was the result of a classic short-squeeze. There are a few specific concerns about the bailout. How will specific loans be issued, and what will be the accompanying terms? Second, it does nothing to address the underlying fiscal problems that precipitated the crisis, and may in fact exacerbate them since countries have less of an incentive to rein in spending. Other countries may continue to skirt the kinds of actions that would lower their budget deficits and debt loads…because they too can expect to be rescued.
As everyone has been quick to point out, the bailout probably makes a partial dissolution of the Euro even more likely, because it is tantamount to deflating the currency. The basic premise…to unify monetary policy…. To be fair, the EU has certainly bought itself some time. I never expected the Greek debt crisis to reach such a dire threshold in such a short time period.
Meanwhile, net shorts against the Euro have reached a record 89, contracts, according to the weekly Commitments of Traders report. The answer, it seems, is a self-fulfilling belief not only that Greece will default on its debt, but also that the credit crisis will spread to the rest of Europe.
Meanwhile, credit default swap spreads on Spanish and Portuguese debt is also creeping up. At this point, there seems to be very little that Greece can do to mitigate the crisis. It has already announced a series of austerity measures, including wage cuts and tax hikes, designed to narrow its budget deficit. On the other hand, the austerity measures were met with riots, which left 3 people dead, and signaled that the Greek citizenry would sooner vote out the incumbent government than accept their proposals to reduce the budget deficit.
Of course, this assumes that GDP growth will turn positive in , and this is no guarantee. Meanwhile, the aid package will probably be enough to tide Greece over for only about 18 months, after which point it will have to return to the capital markets. With this possibility in mind, it makes it very unlikely that investors will continue to buy Greek bonds at all, let alone at affordable interest rates. They still have to repay the money.
They still have to repay the interest. Finally, there is the risk that the crisis will spread to the rest of Europe. Both the IMF and the Spanish government have been busy refuting rumors that Spain is seeking a similar bailout. Regardless of its veracity, the fact that such a rumor even exists will be enough to make investors sweat. Fortunately, it seems that Spain and its neighbor, Portugal are in strong enough shape that they could survive a sudden speculative attack from investors.
Greece, however, is basically a lost cause. Until that day comes, uncertainty will persist, and investors will continue to doubt the Euro. Just when it seemed investors had fully digested the implications of the Greek debt crisis, they once again turned their attention to it and attacked the Euro with renewed vigor. Since I last posted on this issue, there have been a handful of key developments, the most important of which was the approval of an emergency loan packaged.
Since then, the Euro has cooled, the Greek stock market has dropped, and borrowing costs have surged: Of course, there is also the concern that even if Greece can raise enough short-term cash to remain solvent, it will once again face trouble in the medium term: Unsurprisingly, experts have begun to look at alternative scenarios, such as leaving the Euro.
The consensus is that it would be mechanically and legally feasible, but economically catastrophic. As many analysts have been quick to point out, Portugal, Ireland and Spain are in equally bad shape. Perhaps, it is the unique combination of factors which has led investors to focus on Greece in particular: By virtue of belonging to the Euro, all of these countries must face their debt problems as they are, and cannot attempt to alleviate them through currency depreciation.
It is for this reason that I think that the EU will continue to be the main loser from real and perceived debt crises. As you can see from the table below , of the ten countries whose debt positions are least sustainable, seven of them are current members of the EU. If you look again at the Greek debt crisis specifically, there are really only three possible outcomes: Only under the first outcome, then, would the Euro not suffer, and unfortunately this one seems least likely.
Of course, the ultimate resolution of the crisis is still many years away. This discrepancy can best be explained by the presence of speculators, which are also working to push the Euro down.
Interestingly, the EU is currently mulling a ban on speculative naked CDS purchases , which would theoretically lead to lower CDS premiums and in turn, assuage other investors that the likelihood of a Greek default is low.
However, there is still the possibility that speculators would continue to push down the Euro, for lack of a better strategy.
In fact, they could even redouble their short bets against the Euro, since the CDS ban would deprive them of a valuable strategy for betting directly against Greece. The best hope, then, for the Euro is probably just that investors will simply get bored with the story — as they eventually always do — and turn their attention to something else. In other words, as perceptions abound that Greece is insolvent and the Euro is doomed, Greek bonds and the Euro have lost value, which only makes the crisis worse.
It seems that speculators are taking advantage of this phenomenon by making large bets against the Euro. The WSJ reports mention private meeting between hedge funds managers and investment banks helping their clients bet against the Euro using derivatives. In fact, one popular options trade is based on the the Euro falling to parity against the Dollar. But emotion has no place in forex trading, and standing in the way of momentum would be costly.
On the other hand, Euro fundamentals remain strong. To be sure, a currency is only as strong as its constituent parts, and the fact that a handful of EU member states have shaky finances certainly cannot be dismissed. At the same time, the fact that such currencies have no direct control over the Euro is just as important. Before the inception of the Euro, currency traders would be justifiably concerned that a country in a similar position to Greece would deliberately devalue its currency by printing money in order to devalue its debt and make it more manageable.
Now, this would be impossible, since the Euro is controlled by the European Central Bank, over which Greece has no power. This is especially true for the ECB, which has a single mandate—price stability—unrelated to fiscal problems.
Then again, logic is not exactly a word that I would apply to the forex markets, now or ever. With this post, I want to try to clarify the Greek fiscal crisis. The Financial Times published a great timeline that shows perception and reality side-by-side. In fact, the markets only became bearish on Greek debt after it the government announced that it would try to bring the debt down to 9.
This currency-cross features the Euro and the Turkish Lira. In this pair, the value of one Euro is quoted in terms of the Turkish Lira. Traders were attracted to the high volatility associated with this pair during pre-crisis conditions. Since then, volatility has declined due to monetary policy aiming to maintain price stability in the Euro-Zone.
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A demo account is intended to familiarize you with the tools and features of our trading platforms and to facilitate the testing of trading strategies in a risk-free environment. Currently, the pair is trading at Job growth surged in September to its highest level in seven months as the economy put up another sh Turkish inflation surged to nearly 25 percent in September from a year earlier, official data showed The DAX index has posted losses in the Wednesday session.
Five things the markets are talking about European markets have so far shrug Currently, the pair is trading Euro jumps on Italy budget headline Italy is trying hard to convince the rest of Europe that its mo Former British foreign minister Boris Johnson made what was seen as a blatant pitch to replace Prime
It was probably a combination of both. Still, if you maintain your positions for long enough, either you will break-even from the exchange rate or it will only marginally affect your returns on an annualized basis.
It is for this reason that I think that the EU will continue to be the main loser from real and perceived debt crises. When eurozone interest rates are higher, the dollar weakens.