Sunday, July 8, 2012

Euro loser - four ways for decline


The Euro is going to be a big loser through four ways, so the trend lower is unlikely to be reversed without significant change in market conditions.

Markets respond to rate changes and the carry trade suggest that you borrow in Euros and buy higher rates. This is bad for the Euro. Low interest rate countries which have been running current account surpluses have been able to navigate the lower currency rate pressure, but this may not be the case for the EU.

Growth is slow. There is a recession which is bad for the Euro. It is unlikely that we will see stronger growth for some time. 

Credit is bad. The risk of holding EU sovereign bonds is real and makes stashing cash in the EU dangerous. Flight to safety effects will still dominate the currency.

There is still policy uncertainty, from a lack of clarity on Greece to higher tax rates in France. Uncertainty will not make the EU the place for foreign direct investment.

As important, there are will not be a strong call for an appreciation of the Euro by the EU. Follow the trend.

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