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Masoud : EUR/USD Review 16 May 10

Hello Koala King and folks.

Good day to you!

European Union leaders held an emergency summit in Europe to prevent a further fall of the markets. Euro started the week with a good gap upwards. However, the Brussels summit had no details of how help would be like for members of the Euro. Investors saw no reason to be positive and the Euro started to fall again. Although they said that all were ready to do any act as required, detailed practical solutions were absent.

Euro Zone members ultimately decided to provide 750 billion euros in loans to most hit countries of the debt crisis. This was to avoid a spread of the crisis. The International Monetary Fund also supported the package. An opinion of mine is now that they openly announced the aid for the most hit countries, it seems to suggest that there is a storm brewing in the Euro Zone. If so, why are the affected Euro Zone nations hiding it?

The ECB and Mr Trichet held a strategic conference on the previous Thursday and they said they did not discussed about Greece. However later, they had no choice but to issue an emergency declaration that the ECB would buy debt to create stability. Similar to 2008, the Federal Reserve was determined as necessary to inject dollars to European banks and even Australia contributed to the injection. The UK apparently did not contribute.

Due to these events failing to meet market expectations, more Euro weakness was seen. In this context based on the inability by Trichet and ECB to determine the complexity and sensitivity of the decision makings, in my opinion Trichet did not manage this crisis well enough and part of the crisis was due to the wrong decisions of Trichet.

Cost of insurance against the bankruptcy and European securities CDS rose again. This suggested increasing concerns towards the Euro crisis.

Important cases in the falling Euro:

1 – probability of Dubai not paying back the debt 2 – Publication of rumors about the possibility of reduced credit rating of France 3 – News Director Deutsche Bank mentioned the possibility of a non-payment by Greece on her debts 4 – The report of an alleged threat by Mr. Sarkozy to withdraw from the region Euro 5 – Lehman collapse.

All of which caused further risk aversion.

As I said a few months before the second wave of the economic crisis would probably be very dangerous. This is because the first wave only consisted of the banks and financial institutions. Governments injecting money into banks and institutions helped to prevent crisis, Now the crisis has spread and this time it is the governments who faced budget deficits. They do not have money in the Treasury market for any injection and there is rising inflation. All of this makes the second wave dangerous.

One note about China:

In China, inflation has gone up too. Housing bubbles are visible signs of growth and consumerism is strong. Yuan faces a lot of difference between the real and purported value. Sooner or later the economic bubble of China may burst. China is also affected by the crisis and if this wave of crisis in Europe spreads, it may trigger massive recessions affecting countries around the world.

As I said a week ago, I still believe the euro may fall further, This loss may continue until 1.19. As you can see this week with bad news from Europe. selling the Euro from the tops may be a choice. If there are positive developments, instead of buying the Euro, a better choice may be the more stable currencies such as Australian dollar and Canadian dollar.

Have a great weekend.


Masoud is a businessman and a Senior Koala. Connect with him at our page on Facebook.

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