The Euro is losing ground

The market managed to rise last week, putting a pause to a major downward rally, this being the most relevant fact. The situation in Greece, which is becoming Europe’s situation

The Euro is losing ground

The market managed to rise last week, putting a pause to a major downward rally, this being the most relevant fact. The situation in Greece, which is becoming Europe’s situation, he still plays an important role in financial markets. Many expect an early, although the country can take years to resolve the merits. The current problem is the uncertainty over future debt payments of the country and the contagion effect. A massive debt and a huge fiscal deficit can not be resolved from one day to the other, and for a country like Greece, it is impossible not to pay certain costs.

The situation in Greece over fears that the same situation is repeated in other countries such as Portugal and Spain, are generating a major setback to the Euro and other European currencies (the mere act of evaluating who may be the next Greece and implies distrust). To make matters worse, the data were known for growth in Europe (very weak reading of the fourth quarter of 2009), instead of helping generate more questions and increase the chances that the common currency will fall further. The European Central Bank may be delayed start raising interest rates, making it less attractive to the euro. European leaders said that they left alone to Greece, for the moment it is not clear as to help.

Another important event took place during the week was the announcement from China by a further increase in reserves that commercial banks must keep with the aim of cooling the credit market. The impact on the world of this measure is clearly negative, but has an important rationale for not pushing the economy beyond its means. It is also a way to create a tool in the future, if the activity falls again or investment.

Unrelieved pressure on the Euro

Last week the currencies of Australia, Canada and New Zealand continued to appreciate against the Euro. Some of them are at historic highs, a little over a year the situation was reversed. This reflects how the market mood has changed so quickly, driven by a reality that markets usually overreact. “That rising euro has gone too far or the current downturn is being excessive? The truth is that the euro has gone from being a candidate for global reserve currency to be relegated below those of countries with lesser economic importance: all in less than two years.

But this will have a positive effect on the common area countries since the euro to depreciate, their products become more competitive and promote exports, helping economic recovery. The opposite will happen to the dollar if fresh fears take hold of the markets. With the role of global reserve and strongly appreciate the export sector would be heavily punished, imports would be encouraged and as a result the trade deficit should increase. Whereupon, one of the major global imbalance, which occupies some space within the causes of the crisis of 2008, still exist.

When it’s long term …

Undertaking a journey through different regions of the world, you can see how there are times where politics was gaining ground to the economy, but over time the economy always ends up prevailing. In South America, Argentina, Paraguay, Ecuador and Venezuela, currently have energy problems: these countries have faced similar situations in recent years and have enjoyed a fiscal surplus and a stable macroeconomic (maybe never was better in the whole region taking it altogether). The leaders have also followed similar policies: they set up rivals invisible, living under alleged threats of destabilization and blame capitalism and imperialism for most of the problems. With so many problems “like thinking in the future? Now, when the situation turns around, when revenues are not the same as before, when warnings about inflation and energy finally become a real problem and is clearly visible when the actions taken by different governments in different countries. In countries where the cover of newspapers do not refer to energy problems, means that have been prepared to supply an ever greater demand, to give a simple example, and invested in the sector looking to the future.

Can you draw a parallel with Greece? Yes and not only with Greece but with the economy in general. While the boom lasts or the good times to do the necessary things, not just when they get worse, but also when matching better to have that grow. The big problem is that it involves moving away from populist bias of the rulers at a time when the public accounts and reserves allow increased spending or financing the country has. The problem of fiscal deficits and debt, is one that if not confronted at some point, it grows like a snowball and snowball that when good times come, it must necessarily stop and take smaller, but When hard times come can be carried all before them. Another important issue is to separate purchases between what is public consumption (and spending) and investment. Much consumption, low investment, sooner or later leads to problems. We must find a balance and not leave until later what can be done today (investment) and not necessarily encourage consumption because. In times of crisis it is appropriate to apply so-called populist policies, because it is the State who can go out and promote spending by the private sector is falling, but in times of growth, must be left to the private sector work. Not doing so implies that when the crisis, the private sector will be in reverse and the public sector will not have funds to stimulate the economy and funding not because nobody will want to pay him money.

You can also draw a parallel with monetary policy by several central banks. If the Fed takes years to begin withdrawing monetary stimulus, in some ways this limiting framework of action for those who must face a future crisis. If rates are already at the minimum, lose a tool to stimulate the economy. In turn, if the bank’s balance sheet is above normal levels, run out of regular measures for action. The future is difficult to predict the economic sphere, so that you can do today that will benefit us in the future, do it today.

And what has this to do with Forex? While short-term decisions virtually nothing in the long run the currency of those countries only acting always thinking about today and tomorrow never will tend to lose value. Both because other countries will be most desirable but also the internal affairs of these countries that the population will be suspicious of their local currency and arises from it, generating a further devaluation and put more pressure on prices.

Facundo Molina is founder and director of MolFX - Management, a company fully specialized in Foreign Exchange Markets, with an important client portfolio through Capital Markets Services LLC (CMS). He has a BA Business Management at the Universidad Nacional del Sur (Argentina), where he has a doctorate degree based on the application of Fibonacci theory into financial markets. He also acts as professor of new and experiments traders.