THE latest revelation in the Greek debt saga is that investment banks on Wall Street helped Greece and other southern European economies to move some of their debt off of their balance sheets through the use of securitisation and swaps over the past 15 years. This allowed them to reduce their official budget deficit figures to below the Eurozone’s ceiling of 3 per cent.
Greece’s debt dilemma is now turning into a full blown credibility crisis for the Eurozone, especially since these securitisation issues were accepted as legal by the European Union’s own statistical office. These revelations are likely to continue to chip away at investors’ confidence in Europe, and they don’t bode well for the outlook for the single currency.
Pressure is mounting, and the technical signals are also bearish for the euro, says Michael Hewson, technical analyst for CMC Markets. Currently one euro is worth $1.37 and Hewson says there is a risk the euro could fall furth. The level to watch is $1.3485. This is significant because it is the 61.8 per cent Fibonacci retracement of an uptrend – $1.2455- $1.5145 – that has been in place for more than four years.
WEAKNESS TO CONTINUE
If the euro does break below $1.3485, then Hewson thinks this will cement further weakening for the single currency. He predicts the euro–US dollar rate will fall to $1.32 by the end of March and $1.24 by the end of the year. There have been a flurry of downgrades for the euro versus the US dollar since the outbreak of the Greek debt crisis. This includes Barclays Capital, which has reduced its three to six month euro-US dollar prediction to $1.35.
But this is not all bad news for Europe. A weaker currency could actually heal some of the problems afflicting the peripheral economies of Greece, Portugal, Spain and Italy. “The euro is structurally too high,” says Hewson. “A lower exchange rate is the only way for these countries to grow their way out of this crisis because it will make their exports more competitive,” he explains
WRITING ON THE WALL FOR THE EURO
Bearish signals started to show up for the euro in December. Japanese candlestick charts for euro – US dollar emphasise the relationship between the daily opening and closing price. It refers to Japanese trading psychology, and is used by technical analysts and traders to predict reversals in price trends. Hewson says that the euro–US dollar candlestick chart posted a bearish engulfing month last December. This means that the euro started trading in December, above November’s closing price, but, crucially, it closed below November’s low, which suggests more weakness to come. A bearish engulfing pattern, says Hewson, is very rare and it has only happened to the euro-US dollar once before in the last 10 years, back in January 2005 when the euro fell more than 1,000 points. This pattern suggests that a period of prolonged weakness is in store for the single currency.
Although the trend is lower for the euro, the pace of weakening could slow in the coming months, says Hewson. He points out there are two bearish channels for euro-US dollar. The short-term channel (the blue lines on the chart) represents rapid price depreciation for the euro. If the euro were to break out of this short-term channel any time soon, it would need to sustain a break above $1.37. However, any move higher should be capped at $1.4083, which is the upper boundary of the broader euro-US dollar channel (red lines on the chart). After that, although the declines in the euro could be less rapid, the next level to watch is $1.3442. However, any more bad news emanating from Greece could speed up depreciation.
The euro’s nadir should be $1.25, according to the broader down trend.
Europe faces an upward battle to restore confidence in the merits of its union. But, for investors, this will be an easier ride. According to the charts, the euro should roll downhill from here.