Monday, 6 December 2010

How much does Germany love the euro?


The daily chart for EUR/USD from an Ichimoku perspective is quite revealing as it shows that the EZ currency met rejection at almost exactly the point anticipated. After peeking into the cloud and reaching the $1.34 level the rate has retreated below the cloud and, at the time of writing, is now sitting close to $1.33.

As can be seen on the chart another break below the upward sloping trendline not far below the current exchange rate would validate a five down wave interpretation and suggest that the $1.30 level is back in play.

Fundamentally there are several items that are playing into the double bind issues which confront a resolution of the severe architectural flaws of the EMU mechanism.

An interesting piece at the FT Alphaville website has pointed out that the plans to replace the EFSF, which has a built in termination date of June 30, 2013, with a new European Stability Mechanism (ESM) is facing legal/conceptual hurdles because, according to the wishes of the Germans, new debt issued from the ESM vehicle would have "preferred creditor" status and seniority over existing debt. Apart from the obvious issue that this will simply reinforce the buyers' strike (apart from the always reliable ECB that is) for existing instruments, the further problem is that by insisting on seniority for the new debt it is conceivable that default/restructuring clauses could be triggered in a variety of CDS arrangements.

Not only could there be another rush to the exits for eurobonds (as the demarcation between sovereign issues and other structured instruments is becoming increasingly blurred) but there could also be a rush to the courthouses. This is making the EU mess even messier.

The second problem, which will almost certainly lessen the appetite for further political/fiscal integration of the EZ is that the 10 year bund yield keeps moving higher and is approaching the yield on the equivalent UST. This remarkable phenomenon will not go down well with German policy makers or their electorates and may hasten the day when the consensus view within Germany is to return to the Deutschemark.

Over the weekend a poll by a major German TV network found that almost 60% of Germans would now like to see Germany abandon the euro and return to their much loved former currency. For the technocrats in Brussels this may well be, to use a wonderful American expression, where the rubber meets the road.

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