Target for the Euro

Reports out of Europe say a huge scramble for gold coins is on. Dealers have run out of inventory. This is a microcosm of the Creditanstalt Problem: at some point bailouts no longer work, and creditors run for the exits taking the rescue funds with them. As a senior PIMCO manager said: "the risk is that investors are using the ECB as a vehicle to exit their positions." Well, duh! Amazing it would happen at the same time period in May as it did in May 1931. 

The Euro hit the next support level at $1.233, the Oct08 level, and after going slightly lower to $1.223 bounced around the time the ECB announced concrete steps to sterilize their recent purchase of PIIGs bonds (in order to maintain the supply of Euros as constant). This may alleviate inflation concerns and spark a short-term recovery. If turns down again and breaks below that level, the next range is $1.164 - 1.18, which provided support back in 2003-05. Chart and analysis from MP Trader (via SlopeofHope) below. 

Goldman Sachs in contrast has a target of $1.35. They think the Eurozone will grow about as fast as the US with Germany making up for austerity among the much smaller PIIGS, and hence think rates settle back a bit. More on that in a later post. If the ECB intervenes strongly enough, a huge short squeeze could drive the Euro back above $1.35 quickly, and it might settle back down there. 

Calafia Beach Pundit points to purchasing power parity (PPP) levels, which are $1.15 in the Euro and $1.42 in the Pound. Both these currencies might get there, fast, and overshoot to the downside. The most over-valued currencies, however, may stay that way a while longer:

• AUD at 89c is way above parity at 68c, giving it a lot of room room to drop
• Yen at 121 per $1 also has a ways to drop from its current 93 

Those two currencies are way above PPP due to the carry trade. The Yen is a major carry-trade currency, and the AUD is a major beneficiary of the carry trade in both Yen and USD. Per my recent post on the AUD, if the carry-trade unwinds due to the crash, both have a lot of room to drop vs the USD. Of course, any rate increase in Japan puts their country into a deep hole, given that interest on the debt (at very low rates) can hardily be covered by taxes. 

 

Comments

[New Trader]

Rumour- China may soon release a second stimulus package.

[JimS]

This just in:

Cramer: Six Reasons to Buy Gold Right Now
http://www.cnbc.com/id/37192473

Time for a short term but significant correction?

[Wave Rust]

GS is right ,,,, 1.35euro, at least.

you know what that means for US indices.

hang on

wave rust

[Hockthefarm]

Here is a note from Richard Russell. I'm not a big fan and know some smart folks who use him as a contrarian indicator.

But every dog could have his day I guess:

http://tinyurl.com/295r9aa

Sounds like the bear is in the box.
Hock

[MHD]

With Germany banning naked CDS short selling, the Euro is really smelling rotten. 1.35 might be a tad optimistic.
Yelnick... I hope you post some info on this, and put it in plain English for people like me.

[MHD]

The more I read on this move by Germany, the more they say something is very wrong and about to expose itself. They some it up by saying this move is beyond stupid. So what's up?

[MHD]

Sum it up:)

[Mamma Boom Boom]

>With Germany banning naked CDS short selling, the Euro is really smelling rotten. 1.35 might be a tad optimistic.<

Two things: (1)the Euro would need to fall to about 85 cents to be a real problem (2)banning naked anything is a good thing (in the markets, that is)

[Mamma Boom Boom]

China-man's index could be at or near a bounce zone.

[Mamma Boom Boom]

Funny how all dem bulls went 'MOO' then disappeared, never to be seen again.

[yelnick]

MHD - summing it up:
- the Euro will continue to fall at least to $1.18 or slightly below
- The ECB is not intervening to support it
- the naked short ban will perversely drive CDS levels higher for PIIGS bonds
- the market has done the math:

[yelnick]

MHD, on the short ban, here is a good post to read: http://blogs.wsj.com/deals/2010/05/18/ahh-note-to-germany-short-selling-bans-dont-work/

The Germans are banning naked shorts, not all shorts. The received wisdom on short bans is they have a temporary boost, as shorts close out their positions, but then undermine confidence in the instruments affected, so exaggerate the prior trend (which had been down).

The best summary I have seen is this: " All these short sale restrictions are going to do is create a vacuum. Once the shorts are driven out these shares will plunge."

There is a nuance here, in that naked shorts can short more shares than exist in the market, so banning that with stocks makes sense. Leaves normal shorts to keep market honest. The studies I have seen have been about short bans, which tend to result in market crashes. Naked short bans, however, may have less of an impact - the pressure is reduced but the trend is not changed. Maybe it doesn’t lead to a crash, but it does not prevent the drop.

I may post more on this tonight.

[Wave Rust]

momma,
you havent got a clue at all about this market stuff, or trading or analysis or e-wave, do you?

wave rust

So, Momma, which trades first, dow 10,200 or dow 11,000?

Any trader, economist, investor, currency trader, suburban housewife knows the answer to that question

[Mamma Boom Boom]

Wave Rust< I didn't take you for a imbecile.