Euro may turn around: US$ rally may soon end

Category: Eurozone | Forex Trading | INR
May 16, 2012 | 2 Comments » |
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Euro may turn around:US$ rally may soon end

Euro may turn around: US$ rally may soon end: INR may retain some weakness.

The euro fell to a four-month low against the dollar on Wednesday and was poised for more losses after Greece announced it would hold new elections, boosting the risk that the country could exit the euro.  Investors are getting increasingly worried about whether Greece will remain in the euro-zone. The euro, which has lost more than 4% so far this month, dropped to $1.2678, on course to test the low hit in January of $1.2624, below which would mark the Euro’s lowest level since August 2010. The euro also hit a three-month low against the yen, while the US dollar rose to its highest in four months against a host of other currencies also.

What one has to realize in its true form is that, rationally the strength in the US dollar is not by its own merits. The rise is partially due to the Optical illusion created by the apparently improvising US economy & partially due to the currently-in-focus real fears of the anemic Euro Zone Nations in stark contrast.

The US$ strength is aided by the weakness in the Euro which is weighed under pressure from the increasing severity of the sovereign debt crisis and deterioration in the economic health of peripheral nations that show no signs of improvement. The Euro currency deteriorated on the world foreign exchange market as traders sought out the U.S.$ and U.S. Treasuries for safe-haven assets. The Commodity markets are also more keenly focused on the serious trouble that Greece’s presently unstable government has caused for the entire EU, regarding dealing with its collective financial problems.

A rallying U.S. dollar index and lower crude oil prices helped to send gold and silver prices downward. Perhaps the most important reason gold has not been able to move higher in recent months – the recent spate of apparently good news from theU.S.economy (improving employment, output and consumption statistics) diminishes expectations of further U.S. Federal monetary accommodation – quantitative easing (QE3). This paints a rosy picture & is driving institutional traders and speculators around the world trading in paper gold, away from buying Gold as a safe haven.

The scenario, post the November elections will be largely disappointing to those expecting a better future, due to the current politically driven dressing up of the economic statistics. It seems most unlikely that the U.S. economy can actually conjure up a healthy recovery in the face of a, yet very high unemployment rate, seemingly rising consumer spending, an extremely depressed housing sector with foreclosures yet continuing to rise, cutbacks in state and local government spending & a huge burden of private & public-sector debt. What aptly favors to the financially logically mind is that the politically motivated illusion of the dressing up of the economic statistics will not last long & sooner or later, an additional Federal monetary infusion- quantitative easing (QE3) seems to be un-avoidable. Gold may again respond with an explosive upside move as financial markets take note of the still anemicU.S.economy.

Our view now: The Euro may find bottom fishing support as it is in a very strong support range of 1.2700 to 1.2610. There can surely be strong & sharp rises for the Euro from here on. The INR has breached the crucial 54.28 technical support level but may bounce up from declines below the same. The Indian currency could bounce up to an extent but may remain weak overall due to the current national fundamentals. The U.S.$ may also witness an extremely Massive downfall, contradictory to the extraordinary rises seen in the last few months.

German officials have started briefing that the groundwork has been done, and that a “Grexit” is now a manageable event. The German newspapers are suddenly full of briefings from senior government officials that everything is under control. But Germany and the rest of the EU could yet devise a workable plan & there can be a mega-bailout. Very little of the earlier bailout money so far has gone to the Greeks. It has all gone to the bankers. A 23 billion euro package (the equivalent of 10% of Greece’s shrunken GDP) to reflate the economy would buy Greece some time.

Euro Zone Update: German Chancellor Angela Merkel reiterated on Wednesday that Germany wants Greece to stay in the euro, but warned that the country must play by the rules and honor its commitments. Greek political leaders will meet today to form a caretaker government to lead the country into its second election, likely in mid-June, after the failure of last-ditch negotiations to form a technocrat government. Throughout the crisis, Merkel has consistently said countries need to reduce their deficits and high levels of debt. But critics, including new French President Francois Hollande say a shift to growth measures away from austerity alone is needed to help Europe recover.

A ‘Grexit’ is a very high-risk strategy & In a far than worse-case scenario: Greek exit prompts other countries to leave the euro & if larger countries follow Greece out of euro-zone, it could cause a meltdown in the European banking sector, which holds billions of euros of sovereign debt of the other troubled economies, as well as private sector loans to consumers. In turn, businesses in those countries would be unable to pay given their suddenly devalued currency.U.S. banks have relatively limited exposure to European sovereign debt. But a meltdown in European markets would be felt in the United States and around the globe in a severe form.

The markets are very highly short on the euro & the currency seems oversold by any technical measure. Some short-covering could send the euro temporarily higher as net shorts in the currency are at three-month highs. The ICE dollar index, which measures the greenback’s performance against a basket of six other major currencies, rose to 81.328, up from 81.286 in North American trade Tuesday. COMEX June gold futures are trading at $ 1526.7, down nearly $30 or 2%.

INR India Update: As the rupee hit its record low level of Rs 54.46 against dollar, the Finance Ministry today said there was no need to panic and the slide would be contained when there is certainty in euro-zone recovery. Rupee is falling due to global factors. The fall might continue till there is a certainty about the euro-zone recovery. RBI is keeping a watch on it,” a finance ministry official said. Earlier this week, Prime Minister’s Economic Advisory Council Chairman C Rangarajan had said the depreciation in the value of rupee was mainly due to a high current account deficit (CAD) which arises when import of goods and services exceeds its export. The CAD had touched 4% of GDP at the end of December 2011. The country’s foreign exchange reserves stood at around USD 290 billion. Earlier today, the BSE benchmark Sensex dipped below the psychological 16,000 level, the first time since January, on heavy selling by foreign funds.

The rupee hit a record low against the dollar on Wednesday, succumbing to the steep risk aversion hitting global markets and highlighting the vulnerabilities of a country facing challenging fiscal and economic outlooks. The INR May futures dropped as low as 54.62 per dollar compared to a close of 53.94. The Indian Rupee dropped as low as 54.46 compared to a close of 53.79 against a dollar yesterday, breaching its previous record lows of 54.30 in December. A Reuters poll on Tuesday showed that analysts expect the rupee to hover near record lows against the dollar for the next month or so and then to start rising against the dollar. The rupee has fallen nearly 10% since its 2012 peak in February. The INR’s earlier decline has been largely due toIndia’s own fundamentals. However, recently it’s been harder hit among the Asian currencies, which is not unusual in a risk-off sentiment environment, and it suffers more because of large current account deficit issue. FII’s are already losing money on the base equity asset and with currency related problems foreign money will be in jitters.


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