2010 has been quite a year for the Euro. In November 2009, it became evident that Greece and several EuroZone countries were in danger of sovereign default and a literal run on the euro ensued. The euro tumbled from a HI of 1.5140 in November to a low of 1.1875 in June. This precipitous decline was finally halted in June when the European Central Bank and International Monetary Fund joined efforts and created a bailout fund for struggling EuroZone countries.
This fiscal gesture reassured market participants and the Euro began a strong climb back up during June and July. The question now is—is the rise in the Euro during June and July simply a retracement of an overall down move, or is it a new trend that will continue higher in coming months? Although both are possible, it seems that the 2nd half of 2010 hold significant downside risk for the Euro.
Fiscal Austerity Measures
In order to qualify for the bailout funds, Greece, Portugal, and Spain were required to implement very strict austerity measures, which meant they were forced to slash budget deficits and curb government spending. During times of weakened economic activity, the general theory is that a Central Bank and government should stimulate the economy through loose monetary policy. Then, as economic growth becomes self-sustaining, stimulus should slowly be removed from the economy. Many economists fear that a premature fiscal and monetary tightening during a recession or too-soon after it can cause an economy to sink further into economic contraction.
This is the fear many economists have concerning the EuroZone in the 2nd half of 2010. The extreme austerity measures introduced in already weak economies including Greece, Spain, Portugal, Ireland, and Italy, could cause these fragile economies to slip back into recession, which would cause complete unrest in the EuroZone. Search forex trading software programs for more information on how to possibly catch this move.
Sovereign Debt
When it became apparent that Greece was going to default in late 2009, there was a run on Greek bonds. By May of 2010, investors were demanding record high interest rates of over 9% to hold Greek debt. These extremely high interest rates pretty much guaranteed an sovereign default, as it would be impossible for Greece to operate under such high interest rates. Fortunately, the ECB and IMF stepped in with the bailout funds, and Greece was temporarily saved. The bailout fund also reassured investors and yield demands for Greek Debt immediately began to fall.
In June and July, Greece, Spain, and Portugal returned to capital markets to issue debt for the first time since the bailout was made official in late May. Investors paid close attention to these bond auctions to see how the market would respond, and quite surprisingly, the market swept up all the debt issued at each of these auctions, and the interest rates were really low. This served to further reassure investors that the worst of the EuroZone Debt Crisis was behind us, and a significant rally in the Euro ensued during June and July.
The major concern is now whether investor confidence will remain high concerning these countries. The current economic slow-down in the U.S., China, and U.K., combined with potentially slow growth in the EuroZone due the austerity measures, could cause Greece, Spain, and Portugal to slow significantly in the 2nd half of 2010. If they do, investors may make another run on their bonds, and that will most likely set off another round of downward movement on the euro. Search for the best online forex broker to see how you can position yourself to catch this possible move.
