Contagion, default and risk – three words that most investors have heard a lot of lately with regards to the Euro currency and the Euro zone. With the recent second Long Term Refinancing Operation; the LTRO, now behind us, is it really still all doom and gloom?
In a nutshell we are now looking at an ‘extra' 529.5 billion Euros available of which 311 billion is fresh money and not regurgitated rolled over old loans. This second LTRO has been spread to 800 institutions and apparently to the institutions that need it – to the little guys. Banks have not got the funding they wanted; funding that wasn't previously available.
What does all this mean to the active traders?
[Related -Buffett's Market Indicator Flashes Red, Prepare To Sell]
On this daily chart of the EUR/GBP you can see a clear rejection of 0.8500, an important psychological level that happens to coincide with an almost classic 200 moving average test. The green downwards sloping trend lines are clearly pointing out the lower highs. Is our next stop the 2012 lows of 0.82200? Traders will be watching for a clear break of the previous daily swing low of the 02 Mar 2012 at the 0.83109 mark to signal a further bearish outlook.
Is it still all too early to predict? After all the LTRO has only just been released all eyes are literally fixed on Greece. Are the loans, the bailouts and other help all just leading to over leverage and exposure for the ECB? Is Greece so deep in the hole that it can't get out? The second bailout of 130 billion Euros will certainly help the private creditors but where did that money come from?
[Related -PBoC joins other major central banks with unconventional monetary policy action]
Propping up Greece is and will continue to cost the Euro. Although it is lent at a low rate of interest it is still above the actual cost of borrowing for the lenders, mainly Germany and France. European banks will lose money. Traders and investors should realize that this is a very long term plan and there is likely to be comparatively little effect on the Euro currency in a positive sense. The Greek government is still spending more than it receives and EU leaders are still arguing that they have no other choice but to continue to support Greece even if it hurts the overall economy in the short term.
Greece is generally in the forefront of the news, but it is not alone. Plenty of Euro zone countries have perhaps enjoyed themselves a little too much for the last 10-12 years and ran up an expensive bar bill. Some say that their governments and citizens are both to blame due to high government debt and high mortgage debt. Now that the crises is in full swing, both government and citizen alike are unable to repay their debts, particularly as they are having to deal with spending cuts and subsequent tax rises.
So what does all this mean for the little guy? Do we buy or sell Euros? Common opinion is that the only trade you should be doing is one that involves getting rid of any Euros you may own. But, even in the face of all the current news, the points made above and ‘how the charts look', it is still just way too early to make that call. After all, as every trader knows… trade what you see, not what you think.