Several Currency Strategists Euro Vulnerable But Likely To Survive

According gold precious metal market rate pricing site, Kitco News reports that although the euro is showing signs by traders of struggling to survive they feel there is some exaggeration to its reports.

Kitco News is apparently being told by currency strategists that European authorities are seeking various program initiatives to preserve the monetary currency zone.

However, in looking at yesterday’s Eurozone chart shows a steady decline of 15.04 percent from June 3, 2011 to June 1, 2012. Much of the staggering decline was in part due to the lack of Greece and their failures to secure repayment of debts from European Central Banks through emergency liquidity assistance. Spain’s recent emergence as the eurozone debt crisis leader with the closure of their third-largest bank due to insolvency. With bond-yield rates rising in Italy, this will result in an additional bailout to resolve their economic and financial market concerns.

Andrew Busch, global currency and public policy strategist with BMO Capital Markets expressed the euro may bounce back due to the currency is being oversold. “On a short-term basis, we’re definitely in extreme territory with the euro putting in new lows almost every day for about two weeks.”

Marc Chandler, head of currency strategy with Brown Brothers Harriman suggests that there will be a record net-short position in euro futures. “Because the election polls suggest a dead heat (in Greece), the market is not going to want to go into it with record short euro positions,” he said. “So I think we do get some reduction of short-euro positions before the Greek election.”

Last month Greek parties failure to form a coalition government after their nation elections did not send encouraging signals that the country would abide by their bailout program terms. Leading to strategist expectations to view the euro weakness to continue as seen by Mr. Chandler’s expressing the euro could fall to the $1.18-$1.17 level.

With the prevailing matter of Spain’s banks failing leads the position of the euro currency could fall even further before reaching a bottom.

“The (euro) decline in May was substantial, so there is certainly the potential for the occasional upward correction,” said Robert Lynch, strategist with HSBC. “But I would expect, barring some unexpected improvement in the backdrop, the bias is going to be to sell into corrective gains that may develop.”

Strategists are still expressing optimism that Europe will find some way of stabilizing the euro through workable solutions. Chandler said he looks for “more integration and not disintegration.” But went on to say that it could take some time and pointed out that in the U.S. since the Civil War, the southern states that left the Union are the poorest states in the U.S.  Likewise, since the fall of the Berlin Wall, he mentions, we still see today eastern Germany struggling behind western Germany which has been several decades since the reconstruction.

Analyst have also indicated that since the Greek crisis emerged, European leaders have increased their working cooperation with the European Financial Stability Facility through sovereign-bond purchases with the European Central Banks (ECB).

“Out of the current crisis, I think there will be new institutional reform and capacity, such as movement towards banking union, and more steps toward fiscal union,” Chandler said. “I think what Europe is doing is building the scaffolding.”

Robert Lynch mentions, “Our house view is that Europe does stay together and the Greece does not leave the eurozone, and they (European officials) find some method of both keeping Greece in and continuing to build on things like the firewall to ensure that stressed finances in one country don’t so readily lead to concerns or contagion risks for other countries.”

According to Busch, if Greece should leave the eurozone there will be increased concerns over the stability of the euro as a currency. But he feels that regardless of Greece, Spain and Italy will stay.

“You have to realize that German, French and Italian banks have 750 billion euros worth of exposure to Spanish banks,” he said. “None of those countries are going to leave Spain high and dry…I don’t think people understand the interconnections that are involved here.”

Chandler then goes on to point out that the eurozone has only been around for the last 13 years and in looking at the euro surviving is no different than what the U.S. experience in its early years as it became a nation.

Chandler continues in saying that the eurozone is not yet an optimal currency, but has been able to bring about peace on its continent where before previous currencies could not. “Integration that began in the 1950s culminated in the euro, and that integration is what makes peace on the continent possible,” he said.

Also, Chandler said that there is not a “Plan B” if the eurozone fails. He also sees the union to follow the advice of Benjamin Franklin in what he gave the 13 U.S. colonies. “You hang together, or you hang separately,” Chandler said. “I think that applies to Europe.”

Lynch, however, suggests that that the euro could rebound up against the dollar “by default” as the worries and concerns shift from the European debt to the U.S. debt.

“Longer term, we’re still concerned about the dollar,” Lynch said. “The fiscal backdrop in the U.S. is not being addressed in a serious manner at this stage…Our expectation is that the concern about sovereign risk and long-term sustainability of a government’s finances is going to rotate back and be on the U.S. in the not-too-distant future, probably toward the end of this year.”

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