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A Massive EU Bailout Changes the Game...At Least for the Short Term

A Massive EU Bailout Changes the Game...At Least for the Short Term

2010-05-10 14:30:00
John Kicklighter, Chief Currency Strategist
I have to say, the European Union's 750 billion euro bailout plan was unexpected. An increase over the 110 billion euro package initially considered the week before was inevitable; but such a jump tells the market that officials are serious about getting the regional market under control. This is a significant sum (bigger than the United States primary bailout); but there are problems here. The first issue is with the market itself. This is not the same type of rescue during a crisis of confidence that the world's governments made back during the worst of the 2007-2008 financial crisis. The economic outlook is relatively stable and the pain is from extended speculation rather than liquidity issues. If investor sentiment continues to deteriorate, the shortfalls in the European Union's effort to stabilize the region will be increasingly magnified. Another issue is in the bailout itself. This is a large sum; but we have seen in the past that there has been trouble in activating it in time. Which country has the necessary capital to bailout another? Portugal, Spain, Italy and Ireland are all at risk of following Greece. Germany and France (the two largest EU members) can't simply tap a well of boundless funds. Finally, we have to consider the economic costs that come with these funds. Greece - and whoever may follow - will have to hold to severe austerity cuts to access assistance. This will undoubtedly change the social and political landscape of whatever country comes looking for aid and the economic pain will be severe. Will average Europeans accept this? For my positioning, I had was short euros and risk across the board; but I did lighten the load through last week. My pure risk and technical play, AUDCHF, was the only one to be stopped out. This was a difficult pattern to position for; so I'm not surprised. I may still reevaluate this pair again later. As for my other open positions (EURUSD and EURGBP), I remain short. Both are still well in the money and falling once again. My EURGBP was the most concerning; but my cheap reentry point and wide stop this past week weathered this morning's volatility well. I am a skeptic by nature; so I'll stick with both with trailing stops. And, though volatility has picked up substantially; I am going to be selective with further potential positions. At this momentum both EURAUD and EURCAD look particularly interesting. Both are in very consistent bearish channels as the euro takes its walloping. However, if risk appetite is faltering, there is an argument to be made for the Aussie and Canadian dollars to pull back. This is a fundamental balance between the market's fear over the source of the next crisis and the prevalence of said crisis. These are pairs to watch.

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