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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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From: russwinter	5/27/2005 11:23:43 AM
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Is Everybody Short the Euro? by Boris Schlossberg Senior Currency Strategist Monday, 23 May 2005 GMT dailyfx.com The news could hardly be any worse for the Euro-zone. Italy, according to UK Telegraph is on the verge of Argentine like meltdown as debt climbs to 105% of GDP with €192 Billion of obligations due in 2005 while the country’s manufacturing sector is sinking into a recession. In Germany, the ruling SPD just lost election in its stronghold of North-Rhine Westpahlia – a region it controlled for over 37 years – and as a result Gerhard Schroeder called for early elections. In France the latest polling on the EU referendum is tilting 52% to 48% to Non. Is the United States of Europe on the verge of breaking up? Certainly the FX market is worried. Net speculative euro shorts on IMM rose to the largest number since 1999. Momentum is on the side of dollar bulls. Dealers must be salivating at the chance to take out all the hedge fund stops at 1.2500. But once the order books are cleared – then what? Do things really look that bleak for the Euro-zone? Perhaps not. According to all the surveys, many French voters remain undecided so the margin of victory could still go to the Oui’s In France it has been the Non’s who have made the most passionate arguments for their cause, so presumably those voters who have not made up their minds already are more likely to vote yes. In Germany, the defeat of the SPD’s may be a blessing in disguise as it could allow the more market oriented opposition to more easily implement structural reforms already started by Gerhard Schroeder. Finally with the euro fully 10 cents lower against the dollar since the beginning of the year, the exact same dynamic that drove Italian industry into steep slowdown may provide it with some much needed competitive edge. Make no mistake about it though. If the French fail to pass the referendum, the downward pressure on the euro will continue to intensify. The fear of French rejection of EU Constitution has been the single biggest reason for euro’s decline over the past month. But if the French actually come through with a yes vote, the beleaguered single currency may stage a rally back to 1.2800 just as most of the pundits begin to proclaim that the pair is unequivocally headed to 1.2000.

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