The euro “should” be on the rocks for real reasons

Posted on : 15-01-2011 | By : Andrew Miller | In : Financial News

Tags: Real Reasons, Reasons

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The euro “should” be on the rocks for real reasons, not least that ad hoc fixes to postpone disaster point to a lack of resolve and cohesion among eurozone leaders. It’s not enough to say Germany refuses to pay for others’ mistakes and misfortunes. Europe refuses to admit that the golden rule of fiscal excellence, which has only the carrot of eurozone membership and no sticks—has failed. Greece will have to restructure or leave the eurozone. This is what experts have told us all along—that there is no way to make Greek debt sustainable. On Friday Fitch downgraded Greece to BB+, which is junk and joining Moody’s and S&P with that judgment.

Another reason the euro “should” fall is technical. The euro hit a high on Dec 14 at 1.3497 and failed to match-and-surpass on Jan 14, reaching only 1.3457. We can draw—and so can everyone else—a resistance line between those two points that lands at about 1.3400 today. Failure to surpass the sloping resistance line and the previous high levels tells traders “if you can’t buy it, sell it”.

That raises the interesting question of where a drop might end, if drop is what we get. The linear regression of the big downmove from Dec 14 intersects with the last big low, 1.2588 from Aug 24, at around Feb 18. Channels built around linear regressions are actually fairly reliable in naming support and resistance. That doesn’t mean we will not see euro buying on dips, the recent market behavior of the bulls. In fact, that’s what we expect after the Eurogroup meeting tomorrow, when everyone will come out and speak glowingly about progress. But we smell that the market really wants Greece to default or leave the eurozone, and also that a fall of the Irish government (and change in the bank bailout there) is not out of the question. Tension will not go away easily.

Meanwhile, China is going to make the dollar bulls miserable with louder and more frequent mention of diversification of reserves. We say Washington should tell China it doesn’t care but Washington is no match for the game-playing abilities of the Chinese, so this will probably end in tears.

SPOTCURRENT POSITIONSIGNAL STRENGHTOPEN DATEOPEN RATEPOSITION GAIN/LOSS USD/JPY82.70SHORT USDWEAK12/23/1082.980.34% GBP/USD1.5881LONG GBPWEAK1/11/101.55352.23% EURO/USD1.3276SHORT EUROWEAK12/21/111.3151-0.95% EURO/JPY109.90LONG EUROSTRONG01/14/11110.79-0.80% EURO/GBP0.8358SHORT EUROWEAK01/07/110.84050.56% GBP/JPY131.34LONG GBP STRONG01/12/11130.021.02% USD/CHF0.9663LONG USD STRONG01/10/110.96580.05% USD/CAD0.9887SHORT USDWEAK12/13/101.00862.01% AUD/USD0.9924SHORT AUDWEAK01/07/110.9919-0.05% AUD/JPY82.06SHORT AUDWEAK01/07/1182.840.94% USD/MXN12.0344SHORT USD WEAK12/23/1012.29952.20%