Just the beginning for the Dollar Euro
16 December 2011
TECHNICALS:
WEEKLY CHART
The market looks to have completed a Head and Shoulders reversal.
Bears have been further excited by the push down beneath the Prior Low at 1.3149 – which is additional resistance on any rallies.
Note the minimum move down to 1.15 or so.
The bears are in charge.
DAILY CHART
The day chart shows the sell-off throughout November - the initial reluctance to break down through the Prior Lows is clear too at the end of November.
Then the final breakdown….
We think the market will struggle to recover – now there’s such good resistance above the market to overcome.
FUNDAMENTALS:
Despite last week’s summit, meant to fix the Euro zone sovereign debt crisis, the Euro remains under pressure. Unable to agree EU-wide treaty changes due to a UK veto, Euro zone leaders settled for second best; agreement on an intergovernmental basis covering new fiscal rules, discipline and penalties.
The agreement, unlikely to be in place before next March at the earliest, relies almost exclusively on austerity as a means to fix the problem.
But cutting spending for many Euro zone countries to a level where their budgets move towards the level demanded by the new agreement, will almost certainly consign them to years of recession, since countries like Greece rely on public spending as a major economic motor, choking it off to reduce debt will turn the economic motor off economy-wide.
The Germans seem not to see this, they argue their economy is run on strict fiscal rules and thrives, and so it does but why?
The German economy has world class manufacturers that most can only dream about, but make no mistake, despite their excellence if Germany still had the D Mark those same exporters would struggle due to the much stronger domestic currency.
The Euro, even before the recent spell of weakness, was much weaker than the D Mark with interest rates also lower than they would likely have been if under the control of the Bundesbank.
T he reason for this is that the Euro is comprised of 17 economies, many of them weak and debt-ridden, so allowing Germany to benefit. If at German insistence, the Euro zone periphery were able to cut debt and suddenly grow vibrant private export-oriented industries, interest rates would rise and the Euro would be much stronger; German industry would lose its competitive export edge.
But clearly that isn’t going to happen.
The austerity plan will shrink debt, but it will reduce wealth-creation making it harder for those countries affected to service even reduced debts, we have seen that clearly with Greece. Despite an initial bailout and austerity program, she had to return with an even bigger begging bowl, but accept deeper cuts and so the downward spiral continues.
Now the cuts demanded and due to be implemented, if the 26/27 get their Parliaments to agree, will shrink the economies of more EU nations whether in or out of the Euro.
Germany may have to fund the rescue fund, or at least shoulder the biggest burden, but with the Euro weak and interest rates at all-time-lows her industry gains a big competitive advantage.
The plan agreed is designed to stop a crisis such as this happening again, but does not deal with the here and now. The ECB will keep interest rates low to try and support growth. Inflation will probably collapse. Economic growth will go into reverse and the reduced debt burden will seem as troublesome as before.
The result may yet be Euro zone deflation.
The Euro looks a clear-cut sell.
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USD/CHF Breaking Through 76.4% Resistance