Saturday, May 31, 2008

Has the EUR's long term bull market ended?

The EUR has been in a bull market since 2002 but the economic and political fundamentals of Europe are not looking too good these days...and there are some dark clouds on the horizon for this currency when you consider the broader global socioeconomic framework.

EUR chart

Of course, the EUR was a flawed currency from the start (as all fiat monetary systems are) but since its inception the benefits of globalization have masked many of these fundamental flaws. One of the biggest issues is, of course, the one that always causes problems - inefficient and wasteful governments...

Louis Gave (of Gavekal Research in Hong Kong) summed it up best last year when he wrote ""the combination of low global real rates and low Asian exchange rates amounts to a subsidy for Asian production and Western consumption; d) in the US, the subsidy has by and large been captured by individual consumers; e) meanwhile, in Europe, the subsidy has been cashed in by governments whose debt has skyrocketed; f) we see little reason why, in the near future, the subsidy should be removed; but g) if it were removed, the US would most likely encounter a consumer recession (not the end of the world); while h) Europe could go through a debt crisis (far more problematic)."" (quoted section taken from John Mauldin's Weekly e-letter May 30, 2008)

He further explaine that Global inflation will likely cause Asian central banks to allow faster appreciating currencies and higher real interest rates - meaning that they will not be printing as much money and buying as many foreign bonds.

Mr. Gave also discusses the widening of credit spreads between countries in the EU. Many, myself included, find it hard to believe that a country like Italy has lasted as long as it has in the EU. Why should Italy be able to borrow at the same interest rate as Germany? Well, it shouldn't, and credit spreads are finally starting to show that. But pretty much all of Europe is looking at a relatively severe pension and demographic situation as we move into the future.

The EUR may very well rally further in the short and intermediate term, but fundamentals determine long term trends, and the long term trend for the EUR is reaching a turning point. I think it is a safe bet that a few years from now the EUR will be significantly lower, and looking farther out it is not a stretch to say that the EUR will be disbanded when countries like Italy leave it so that they can go back to depreciating their own currencies. --John Bardacino


  1. [...] Dollar - As stated here in June the EUR has become a “relatively more miserable currency.” But the USD remains relative more miserable than the Asian currencies over the long term and the [...]

  2. [...] June 1 when the EUR/USD was trading near its peak I wrote the following in a post titled “Has the EUR’s long term bull market ended?”: The EUR has been in a bull market since 2002 but the economic and political fundamentals of Europe [...]