The EUR USD touched its lowest level since October 2008 on Friday as investors continued to pull out of the currency on the fear that political and economic problems will lead to a collapse of the Euro Zone economy. The rapid decline is pushing toward the so-called “Lehman Brothers Low” at 1.2329. This support was established at the height of the global credit crisis and marks a time when a global financial disaster was avoided.
Although some feel that the world’s financial system is better prepared for a credit shock than it was back in 2008, a break through this level will have psychological ramifications as well as symbolic meaning. It will be used as a benchmark among global investors who will question whether the world has learned anything following one of the greatest financial meltdowns in history.
Besides the risk of sovereign debt default, investors are now becoming concerned about the lack of activity and the inaction from the European governments. Once again investors are asking the question: “Where is the union in the European Union?”
The inability to stop the slide in the Euro by pumping $1 trillion into the economy with basically debt on top of debt has convinced investors that the EU had and has no plan to prevent the kind of currency slaughter taking place at this time. Investors have grown weary of the reactive moves by the governments and want to see more proactive action.
From the start investors have been asking for clarity from the EU. No one wants to see a currency collapse, but without a firm plan in place, investors have had no options to consider except to sell the Euro.
Friday morning’s selling pressure was rumored to have been triggered by a story in a Spanish newspaper saying that French President Nicholas Sarkozy was threatening to pull out of the Euro. Although his statement has been denied a few times this morning, traders don’t seem to believe the denial.
Although the French have denied the negative statement from President Sarkozy, the Euro continues to remain fragile. After Sarkozy’s denial, rumors began to circulate that serious discussions may be going on to decide the ultimate fate of the Euro. At this time emotions are running high in the Euro Zone as it is becoming clearer that the financial cuts necessary to make Europe financially sound will have huge global ramifications.
Even former Federal Reserve Chairman Paul Volcker has a gloomy outlook for the situation. On Thursday during a stop in London he said “You have the great problem of a potential disintegration of the Euro. The essential element of discipline in economic policy and in fiscal policy that was hoped for has so far not been rewarded in some countries.”
As support continues to erode for the Euro discussions will increase as to how it will survive when there continues to be such a huge disparity between those nations that have and those nations that have not.
The plunge in U.S. equity markets led to a sharp break in the USD JPY. Traders were divesting out of higher yielding assets and into the safety of the lower yielding Japanese Yen. The chart pattern suggests that a further decline to 91.61 is likely over the near-term. A failure to hold this level will fuel an acceleration to the downside. Much of the downside movement in this currency pair hinges upon how the global equity markets will react if the “Lehman Low” at 1.2329 fails to hold as support. With emotions very high in the equity markets, chances are strong that the Japanese Yen will continue to rise.
Weakness in the Euro spread to the British Pound as the euphoria from this week’s creation of a new government has apparently worn off. Investors were nervously watching the events in the Euro Zone unfold with the thought that the same issues can quickly spread to the U.K. At this time, the June British Pound is holding last week’s low at 1.4476, but downside momentum can push the market through this price at anytime.
Thursday’s closing price reversal bottom in the USD CAD was confirmed early in the trading session on Friday, putting this pair on a path toward to 1.0423 to 1.0498. The dumping of higher risk assets led by equities and crude oil was the catalyst behind Friday’s decline. Planned austerity measures by Europe are also likely to have a negative impact on Canadian exports, which should serve as the fuel for more strength in the Dollar/CAD.
Falling stock prices put pressure on the AUD USD but did not reach the point of panic. For most of the day, the Aussie traded weaker in an orderly fashion as traders reacted to the weakness in U.S. stock markets and the exodus from higher yielding assets. Traders should brace for a possible sharp decline on Sunday night however. If the Euro pierces the “Lehman Low,” panic in the global equity markets may set in, driving more traders out of higher risk assets. It all depends on whether the break is market driven or event driven.
A similar repositioning is taking place in the NZD USD. Investors sold the Kiwi in sympathy with the U.S. stock market break, but there was no sign of panic selling. So far everything has been orderly. This may be because of lessons learned from last week’s panic sell-off. Traders didn’t want to overreact like they did last week Nonetheless, investors should be aware that a further deterioration in the Euro Zone economy could have global ramifications which will put downside pressure on the New Zealand Dollar.
While there is much discussion going on at this time about the “Lehman Brothers Low” in the Euro at 1.2329 and how the Forex markets will react if this low is breeched, investors should note that the market traded down to this level during the height of the 2008 credit crisis. Breaking this level will have more of a psychological impact on the Forex markets which means they will be tradable. Another lock-up of the credit markets, however, should prove to be a disaster.
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