We can all agree that Euro hasn't been the strongest performing pair over the last 5 years, especially since April 2018. But what is driving this weakness? How has the banking crisis affected markets? And what's likely to happen to the strength of the euro as more countries threaten to leave?
It helps to have some background on how we got here so per usual we will cover a little history before we look ahead:
1) Europe has been steadily recovering from a soverein debt crisis (2008-2012)
- A sovereign debt crisis is when a country within a certain financial zone (In this case the Eurozone) cant pay back the money it borrowed from the central bank and other member banks.
2) The debt crisis started in part due to the financial crisis in the United States and the great recession that followed. Iceland and Greece defaulted massively on their debt which spread to other countries such as Spain, Italy, and Ireland.
3) The crisis got so bad that the IMF (International Monetary Fund), which normally only dealt with loaning developing countries (mainly Africa) short term funds, had to step in and provide aid for the defaulting nations. The ECB (European Central Bank) stepped in as well as a new entity called the EFSF (European Financial Stability Facility).
4) Lack of confidence as European business and banking followed.
5) 2016 Brexit gets voted on and threatens the sovereignty of the European Union. Many believed that it would lead to more nations leaving the EU, further weaknening confidence. GBPUSD hit all time lows (since 1985).
6) 2016 Italy had its own banking crisis where over $400 Billion worth of debt was classified as Junk. This crisis was lead by poor management on the part of the Central bank. Italy makes up a large portion of the European economy. They requested a bailout from the EU but were denied.
7) The ECB cut its interest rates to a negative number in 2014.
- Negative interest is a weird concept to understand but simply put...
Normally if you go to the bank and borrow money, you'll have to pay them to borrow that money... This is called INTEREST. It is the cost of money.
In a Negative Interest Rate environment, the bank will pay YOU to take it.... this is called NEGATIVE INTEREST. Which means if you borrow $100 from the bank, you may only need to pay back $99.10.
8) The interest rate issue was in theory supposed to stimulate the economy and encourage people to take money and use it to stimulate the economy instead of holding their money in a savings account. Stimulating the economy would increase business revenue, supply jobs, ands keep th economy healthy.
9) In 2019 the Euro Zone still hasn't recovered. Banking crisis, Sovereign Debt crisis, Bond crisis, Brexit, migration crisis, and many other issues have left European confidence at an all time low.
Now we find ourselves in a time where so many countries in the European Union are struggling that its only a matter of time before another recession is due for the Union.
Negative interest rates seem to be having the opposite affect. Brexit is weighing heavy on the European budget. Manufacturing has slowed down significantly in Europe.
So what could this mean for markets? Well with no hope in sight, it might be fair to conclude that the EU has a serious problem and that their current methods of dealing with the issue are not going to be enough.
In conclusion: Short the Euro -
- Pipstradamus [11.8.2019]