EUR Fundamental Analysis 11 August 2009

By William Doody
The Euro weakened on Monday against both the Dollar and Yen as ratings agencies downgraded two Eastern European nations, Estonia and Latvia. Speculation has thus risen that a wave of credit reductions may sweep across the “third tier” economies which have joined the EU in recent years. This speculation has heightened expectations that the ECB may be forced to take further action to make credit more easily available within the Eurozone. Meanwhile, economic data out of the EU continues to be mixed, especially in “second tier” economies in Southern Europe.

We believe that the Euro will weaken over the remainder of the year. Most analysts are forecasting an opposite outcome, which we feel could put further pressure on the Euro should a moderate decline take place. The Dollar has been surprisingly strong over the past several trading days, which may suggest that forecasters are underestimating the U.S. currency. In the final analysis, while the worst of the economic crisis is almost certainly behind us, there is still no evidence to suggest that a substantial recovery is underway. Thus we see no fundamental reason to support a dramatic rise in the Euro, especially with the ratings concerns brewing in Eastern Europe. The actions of the Bank of England to unexpectedly increase their quantitative easing program last week further underscore the risks facing the Eurozone economies.

Trading Recommendation: Small Euro short position