European Plans: Greek Salad and a Flight without Insurance

Sales of euro look good at any growth attempts both from the upper boundary of unclosed gap and from the current 1.1950 – 1.1965 zone
New goals are caused by old problems. The year that passed under the banner of US dollar strengthening reflects logically aggressive policy conducted by Europe and Japan. Closed and self-sufficient American economy will be quite able both to handle dollar growth and the upcoming rate increase, and the major part of the other financial world will not be able to do it. Active appearances by FRS representatives that delicately hinted at the difficulty of working with shadow banks, the instability of financial non-depository institutions, low inflation, and weak growth of salaries expressly speak to Yellen about the need to slow down. The thing is that, for a long time, most of American companies experienced growth at the expense of foreign (including European) income invested in growing dollar; and in the light of the current crisis, annual reports will be much weaker than expected. It can't be hidden any more than WTI fall affects American employment - reduction of profits received by oil-producing companies will lead to massive lay offs and will cause damage to the favorable level of unemployment. Let's see, how dollar will survive the first testing of the new year on the first Friday. Now, the revision of rate increase dates is possible only upwards; however, speculations on this topic will continually keep the market up.

The new Greek crisis combined with the already habitual fall of oil prices poses an active threat to EU. The European stock market experienced a dramatic decline on Monday, Greek aggregate index Athex lost 4.2% (and for the last 3 months - 25%) - as the result when those Greek politicians who speak against budget saving and currency regulations as the basis of granting financial aid to the country came to power. The upcoming election can bring left radical to power and, as a result, pull Greece out of the European Union. In fact, the EU is not against it any more, judging by the article in the Der Spiegel with references to Merkel's statements. Germany, as well as most of EU donor countries, is tired of supporting problem zones without perspectives of at least political compensations. France, positively spirited for exceeding the planned growth of 1% annually, and Great Britain that postponed its pull out from the EU until 2017, are speaking of "frugal" participation in European subvention programs.

By the results of IMF report on currency reserves for the 3rd quarter of the previous year, the general reduction of $218 bln. was noted, and the largest was with regard to euro reserves - $123 bln. (-1.95%). Only US dollar, as it should be expected, showed growth (+1.6%). Today, all those who put their stakes on the debt crisis, made some good profits on all types of European papers. The American debt remains attractive because of high rates and favorable insurance; therefore, the stream to the US Treasury never grows dry. As much money as Europe will print, it will go to maximum profitability and minimum risk zones. Another issuance of money by ECB will sponsor American papers once again and will hardly help Europe without a structural reform. The situation is that even without additional impulses, real European rates are simply bound to move upward, the debt load is growing, deflation has been practically planned for as early as February. Several analysts regard the situation as positive thinking that due to the fall of oil prices, Germany alone can save around €12 bln. this year, and that money can be used for additional development or domestic investments. Mario Draghi, who opened a new information year last week-end, gave a new signal to start euro-QE through his interview with German Handelsblatt and caused euro that had been stuck at the key level of 1.20 to drop by the whole figure even before the publication of consumer price index.

Despite the negative start of the week with gaps and spikes, important euro levels, nevertheless, held out. Sales of euro look good at any growth attempts both from the upper boundary of unclosed gap and from the current 1.1950 – 1.1965 zone. Present minimums held out when tested in 2004 and 2006, and today, in order to penetrate them, serious volumes will be required that, by all appearances, will come to the market not later than on Friday, along with the new NFP.

Author: Navsher Bartash,
ForexChief Currency strategist