Conclusion: A theme we will be discussing more and more is the sovereign debt issues in the U.S., which could lead to a bounce of the Euro versus the U.S. dollar.
If there has been one global macro trend that has remained consistently intact in the year-to-date, it is the decline of the Euro. Since its short term peak in December of 2009 at ~$1.50, the trajectory has been basically straight down.
The decline in the Euro seems to be accelerated by new headlines every day, which continue to support the longer term structural impediments facing the Eurozone. Specifically, as we recently wrote:
- Interconnectedness - It should come as no surprise that the eurozone has willfully ignored its own rule-making. European economies are too interconnected to permit anything else. Most nations within Europe borrow from, and lend to, each other: Spain holds one-third of Portugal's debt; Spain owes Germany $238 billion; Italy owes France more than twice that. So while the Maastricht Treaty requires the eurozone to direct Greece to restructure its debt, most major banks within the eurozone are holders of Greek debt and would distinctly feel the pain of any Greek debt restructuring.
- Lack of Political Consensus - The sovereign debt crisis has exposed the ineffectiveness of a one-size-fits-all monetary policy for a continent with significantly disparate economies. Spain shapes its monetary policy to combat its 20% unemployment; Germany's works to keep its economy from overheating. The absence of a stronger political union to manage the divergent economic goals of the member nations destines the Maastricht Treaty to regular flouting by its members.
So, while the Euro remains in a bearish formation, we are starting to consider trading off the immediate term oversold readings on the long side, then sell high/buy low on the short side on rallies to $1.22-$1.25 from $1.19-$1.20.
The key catalyst for a rally in the Euro versus the U.S. dollar, will be the US facing a European-like sovereign debt crisis in 6 months. While arguably the U.S. doesn’t have the structural issues outlined above, the U.S. does indeed have major fiscal issues with its defict-as-a-percentage-of-GDP in the danger zone of north of 10% and gross-public-debt-as-a-percentage-of-GDP north of 90%. With debt maturities accelerating in the U.S. over the next couple of quarters, the number one reason to buy Euro is being bearish on USD, not being bullish on the Euro in absolute, due to these coming maturity catalysts.
Chief Executive Officer
Daryl G. Jones