Vlad Demochko
Over the last few weeks the mass media have been publishing various forecasts for the destiny of the eurozone and its currency. The experts are trying to answer the questions: What awaits the common currency if some eurozone members leave Europe’s financial union? What will be the Euro exchange rate in 2012? The forecasts vary in different aspects – from general issues to specific figures.
It is not a secret that some companies, banks and even governments start working out contingence plans in case the eurozone does eventually disintegrate. In particular, the Daily Telegraph reports that in case of a eurozone collapse, the UK authorities are ready to close the country’s borders in order to curb the unavoidable inflow of capital. According to the survey held by IT2 Treasury Solutions, 53% of the respondents (the treasurers of major European banks) are convinced that the eurozone will break up within the next 2 years.
The experts of have analyzed most of those forecasts, thus finding weak spots in almost all of them. However, they have refused to make any specific long-term forecast for the common currency so far, because there are too many variables in this equation.
Tips For Investors: Eurozone Will Change
Very few experts are still convinced that the eurozone won’t see any changes in the near future. But most experts has the opposite point of view. The thing is when and how it will happen.
Some global-scale (or at least European) gurus anticipated the end of Euro before Christmas. Others say it is going to happen in 2012 or within the next 5 years. The longer the expected terms of the eurozone disintegration, the fainter the future exchange rate.
What will the future of the eurozone look like? There experts offer several scenarios:
1. There will be no eurozone collapse. The financial alliance will struggle till the end for every single participant because it will be too costly to let Greece (and some other members) leave the eurozone, both financially (50% of its debt is already written down) and in terms of its image.
2. Some eurozone members will leave the union. First - Greece, then - Portugal , a little bit later - Italy or maybe Spain .
3. Tough measures for eurozone members violating new agreements.
4. The demarcation line between the new eurozone and the outcasts. According to , this would be the most efficient solution out of all scenarios mentioned above. This is going to be the division between the prosperous North and the weak, debt-ridden South.
However, another question arises: What about Italy? It is eurozone’s 3rd biggest economy, which is currently having big problems. It is even believed to be on the verge of default. However, most experts (including ) are sure Italy will survive and join the renewed eurozone.
What will be the cost of Euro?
Some experts were risky enough to specify the levels of EURUSD and the exchange rate of new national currencies in case some eurozone members leave the union.
Sberbank (Russia): In early December the experts of Sberbank estimated that the real value of Euro in Greece was $0.97 (while the official rate wass around $1.34). It means that in Greece the common currency is overvalued by 19.5% (the highest figure in the eurozone). In Portugal and Spain it is overvalued by 17,8% and 15,5% correspondingly. At the same time In Germany and France, the eurozone’s 2 biggest and strongest economies, the common currency is undervalued by 5%.
UBS: According to the analytic team of UBS, once a country leaves the eurozone, it will cost each of its citizens € 9,5-11,5K during the first year and € 3-4K more over the next couple of years.
A Ukrainian analytic center: If Greece leaves the eurozone, objectively it shouldn’t affect the current exchange rate of EURUSD. If Portugal follows it, EUR should only lose 1.5% of its value against USD. Once Spain leaves the currency union, it will cost the common currency 7-8% of its value. On the other hand, the exclusion of weak economies should only strengthen the eurozone and its currency.
Nomura bank: If the disintegration of the eurozone takes place at $1,34, the new Deutsche Mark will gain 1.3% while other national currencies will depreciate. The Greek Drachma will collapse down to $0.57, the Portugal Escudo - down to $0,71, the Spanish Peseta – down to $0,86. The national currencies of Italy, Belgium and Ireland will depreciate by 23-29%. Other currencies will lose 9-6% of their value.
The experts of say that these forecasts cause a lot of questions. But let’s consider the main one: What will happen to the US Dollar and other major currencies? It appears that all the forecasts are based on the idea that the US Dollar exchange rate will freeze. However, numerous economic indicators suggest tough times for the US economy in 2012, not to mention the possibility of a double-dip recession.
Going back to national currencies: stuck in a labyrinth?
According to the expert team of , the disintegration of the eurozone with going back to national currencies is not a single-step move. It takes a minute to announce the decision to leave but it takes months and even years to take all the necessary technical and legal steps. Of course, any such statement will instantly cause a market shock and a sharp major downtrend of EUR-pairs. But later the currency will inevitably recover.
In the meantime, according to , the EUR futures chart below shows that there is no intraday volume. So it is necessary to switch to the Daily chart.
The BCA method shows that the short-term bull run (bar 1) is followed by an upthrust bar (bar 2) and an attempt to press the common currency. Bar 3 closed at the top, doji, as well as the next 2. The signals suggest that the supply and demand are temporary balanced, however the supply is slightly dominating the market, which means a downswing to $1.30 is more probable:
Market Leader and would appreciate if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following question:
Is there any sense now in calculating the future quotes of EUR-pairs?
Vlad Demochko
