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The Euro May Be in for a Long, Hot Autumn

Monday, 19 July 2010 08:34 AM Current | Bio | Archive

French Prime Minister Francois Fillon was only doing his job when he recently said in Japan that the euro's current exchange rate levels are appropriate.

“Right now, the euro is still a very strong currency,” he said. “The euro rate is actually quite in conformity with the situation.”

Interestingly, he also acknowledged before the Japanese audience the advantages that the recent falls in euro foreign exchange rates provide Europe's economy, by making exports from the region more competitive.

“In the past, actually, the euro was overvalued, and it had negative consequences on European exports, so I'm not really concerned about this rate in the midterm or in the long-term.”

Finally, he added that the crisis in the eurozone is no worse than the problems in Japan and the United States. He also noted that the eurozone’s crisis is “due to Greece” and not due to any fundamental weakness in the single currency system.

So, once again, Greece is the main culprit for all the eurozone worries.

If it was only that, I wouldn’t hesitate to go straight-out “long” in the euro.

Unfortunately, that’s not the case.

I will wait to see what happens inside the European Union when a series of general strikes this autumn will start paralyzing economies in various countries.

Recently in Madrid, Spain, we got a preview of what the EU political climate could be like from September on during the “State of the Nation” debate (yes, in contrast to the United States, in Spain the “State of the Nation” is debated when it is presented). In that debate, the leader of the main opposition party (conservative), Partido Popular (PP), asked Prime Minister Zapatero of the Spanish Socialist Workers' Party to convene early elections.

You could argue this is just politics like it is in most places in the world.

Maybe this could be, but facts oblige us the think otherwise.

A survey conducted for the main Spanish El Pais newspaper showed conservative leader Mariano Rajoy and his party PP have larger public support than the current prime minister, which has never happened in Spain.

Yes, the EU could be bound for a rather “hot and disturbing” autumn.

There is a growing perception, which I don’t share so far, that the decline of the euro could be over and confidence in the single currency is coming back. I still have my doubts.

The results of the European bank stress tests (due Friday) have forced Barclays Capital to anticipate 100 billion euros ($128 billion) will be needed to restore adequate bank reserve ratios of the 91 banks tested. Meanwhile, nobody knows what the capital needs are of the hundreds of other European banks.

It remains unclear if the sovereign losses for these 91 European banks will be applied only to assets held in trading books, as opposed to those in held-to-maturity (HTM) accounts.

The rationale for applying the stress to trading books only is that they reflect the mark-to-market losses of those exposures. Again, we’ll have to wait and see.

That said and besides a mountain of other things, it could well be that the EU will have to face seriously damaging political clashes in different member states starting in September.

There is no doubt in my mind this could easily become much more important and damaging than the actual “smoke and mirrors” play the European Council (EC) and the ECB are performing so far.

Anyway, if you believe Eurogroup Chairman Jean-Claude Juencker, who told the Austrian newspaper Kurier that the banking stress tests in Europe are unlikely to reveal any “major catastrophes,” there is no reason to worry.

I will not be looking for “catastrophical situations” but for what the stress tests will not tell us. I’m convinced this will be much more enlightening.

As an investor, I’d continue to keep my eyes on the technical charts and analysis of the euro-U.S. dollar.

The dollar’s problems could be emerging far, far quicker than I could imagine.

Maybe broad political discontent in the United States could be one of the serious reasons for it.

If so, then the very important question becomes what safe assets you should hold now that we see some deflation symptoms emerging here and there, but still except in the emerging economies.

Could be, but this may go a long way towards explaining the continued strong performance of the Japanese yen despite the boatload of problems Japan is facing these days and the apparent damage this Japanese yen’s strength is doing to their markets.

Again, political worries seem certainly an increasing disruption factor we’ll have to reckon with in the foreseeable future.

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French Prime Minister Francois Fillon was only doing his job when he recently said in Japan that the euro's current exchange rate levels are appropriate. Right now, the euro is still a very strong currency, he said. The euro rate is actually quite in conformity with the...
Monday, 19 July 2010 08:34 AM
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