(As written for My Paper on 15 November 2011. Click here to enlarge)
The countries which make up the “PIGS” – Portugal, Italy, Greece and Spain, have new leaders.
Portugal is headed by Prime Minister Pedro Passos Coelho, after Jose Socrates resigned in March.
Greek Prime Minister George Papandreou resigned last week to make way for a coalition led by European Central Bank Vice President Lucas Papademos.
Former European Union competition commissioner Mario Monti, has become Italy’s new Prime Minister following the resignation of Silvio Berlusconi.
Spanish Prime Minister Jose Luis Rodriguez Zapatero has decided not to seek re-election and polls show Mariano Rajoy, leader of the conservative People’s Party, will win an absolute majority in the 20 November vote.
These major changes stem from Europe’s inability to contain a regional debt crisis that started in Greece more than two years ago.
The problems in Europe are further compounded by the banks’ lack of capital. In fact, the European Banking Authority has said that they would need to raise an additional 106 billion Euros in fresh capital to meet the new 9% requirement in core reserves.
Lucas Papademos, who was sworn in on 11 November, said that Greece’s new government must implement agreements from last month’s European summit to receive more loans and avoid default.
Monti, an economist and adviser to Goldman Sachs Group Inc, will try to reassure investors that Italy can cut a 1.9 trillion-euro debt and spur economic growth that has lagged behind the euro-region average for more than a decade.
With an avalanche of bad news coming out of Europe, the real question is – why has the EUR/USD strengthened? Since 10 November, the price of EUR/USD has shot up over 300 pips.
The answer, is that traders view changes as positive.
“Monti’s appointment is clearly a positive for markets,” Emanuele Vizzini, chief investment officer at Investitori Sgr in Milan, who oversees assets of about 700 million euros, said in an interview. “This is a first step in the right direction, which will help Italy’s credibility issue.”
A quick check on the bond yields show that support for Monti’s new Italian government is building. 10-year yields have narrowed more than 100 basis points from the euro-era record of 748 basis points on 9 Nov.
With a public debt totaling 1.9 trillion Euros, Italy is the world’s third largest debtor and traders are looking to Monti and his new government to stabilize the Euro after weeks of volatility.
Short EUR/USD at 1.3685
On the 4-hourly chart, EUR/USD has been on an uptrend from 4 Oct to 27 Oct.
The trendline was broken on 31 Oct, with a low of 1.3608 forming on 1 Nov and a lower low of 1.3483 forming on 10 Nov.
This is a clue for us that a new downtrend may be forming. Our bias is hence, to the short side.
An entry is taken on 1.3685 and a protective stop is placed slightly above the previous high. We will exit the trade once prices fall to 1.3550.
Entry Price = 1.3685
Stop Loss = 1.3812
Profit Target = 1.3550