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BY SHAVASB BOHDJALIAN
As the euro touched a new 16-month low on Monday at 1.2665 against the dollar and an 11-year low of 97.28 against the yen, the international media rushed with headlines portraying the move as a negative development, with some going as far as to state that this is the prelude to a breakup of the single currency.
While the newspapers and electronic media claim that a weakness in the euro is a negative development, in reality, this could be the best medicine that the doctor could order to help the eurozone economies emerge out of a difficult situation.
A weakening euro will help core European exporters become more competitive and thus improve employment conditions in the core of Europe. It did not come as a surprise when the euro staged a rebound following news that the German trade balance came out better than expected with figures up to EUR15.1 bln, above EUR13.2 bln consensus. The surplus in October was at EUR12.5 bln. The French trade balance was also better than expected. Core Europe, led by Germany and France needs strong exports to be able to shoulder the burden of rescuing the weaker eurozone countries.
A weakening euro is also positive for exporters based in the peripheral, which eventhough they don’t have a major share of eurozone exports, a weakening euro will make them become very competitive since for the first time in more than a decade, the peripheral eurozone economies are startting to reduce labour costs and become more productive and competitive.
A weakening euro is also most welcome for the peripheral eurozone countries of Portugal, Spain, Italy, Greece and Cyprus in attracting tourists from countries outside of the eurozone and thus give a nice boost to their economies.
Currency traders meanwhile are loving the move since traders make more money when a trend is established and it stays in one direction. Speculators are now targeting the $1.25 level against the dollar as the next objective and many investment banks are rushing with new forecasts, calling for a lower euro.
Underscoring the bearish view on the euro, currency speculators boosted short positions in the currency to record levels in the week ended January 3, data from the Commodity Futures Trading Commission showed on Friday.
The euro weakness is also supported by fundamentals with the US economy forecast to register higher growth in 2012 and 2013 whereas the eurozone is expected to slip into recession. The ability of the US to create jobs and stabilize its housing markets are seen as additional factors which contrasts with rising unemployment in the periphery and more weakness in the housing market in Europe.
German magazine Der Spiegel meanwhile reported on Saturday that the International Monetary Fund was losing confidence in Greece's ability to clean up its public finances and work off its mountain of debt. In addition, an adviser to Germany's finance minister Wolfgang Schaeuble told a Greek newspaper that a 50 percent write-down on Greek debt holdings, part of Greece's debt swap deal, was not enough to put the country's huge debt on a viable footing, according to Reuters.
Markets are bracing for debt sales from Spain and Italy on Thursday and Friday, seen as a major test of investor willingness to plough more money into the region's troubled countries following recent steps to address their debt problems, according to Reuters.
Last year the euro rallied about 15% until August before turning round and finishing the year 3% below where it had started. One could say a reverse cycle is now in play with the euro probably staying under selling pressure until eurozone nations manage to put their houses and finances in order. Once that happens, then it will be time to focus on the chronic problems facing the US and the cycle will reverse again.
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(Shavasb Bohdjalian is an approved Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10 and approved by the Cyprus Stock Exchange to act as Nominated Advisor for listings on the Emerging Market. The views expressed above are personal and do not bind the company and are subject to change without notice)
