The Double Edged Sword of Euro-zone Debt Crisis and Unrest in Korean Peninsula

By: Bari_Baig

Two perfect storms seem to be brewing up fast, one in Far East and the other in Western Europe with both having the potential of becoming category 5 storms[Maximum rating for a storm] and at their mercy lies the global investment world. These storms are bigger and meaner and their head on collision with one another is expected to take place sometime this coming week. Each storm system has a different impact on majority of the investments however; there is one exception and that being of Euro’s fate.

There is a growing concern that Irish Bank Bailout by the IMF and EU is going to be at a premium from that of Greece bailout in May, which would cause a massive selloff in the bonds market however, it is not the threat of a [massive selloff] in the bond markets which we are worried about but to us the classic rule of “Buy on Rumor and Sell on Fact” is a much bigger threat as of now! Until Friday November 19th The Irish leaders seemed reluctant for “any aid” or more importantly were reluctant to even admit the problem at hand of Irish Banking System was something which Dublin couldn’t handle on its own.

It seemed then that Dublin was trying to “buy” itself time until the week ended and over the weekend someone from within the Government gave up and Ireland agreed to take the [easy way] out to resort to IMF and EU to bail them out. This is what the street had its eyes set upon. And the street got what it wanted which was the rumors circulating Irish Bailout were now no more rumors and very much real therefore Euro had to pay the price as Euro practically melted in hours and regardless of peace time [thanks giving holiday] Euro tumbled below 1.3300s where a long term support stood.

So, what we have here is that in the first round of EU Debt crisis, the agreement by Dublin to take aid has managed to push Euro lower by 5 big figures [1.37s to 1.32s] as we had foreseen in our article [The Fights for Survival] dated November 18th on www.marketprojection.net “This sharp reversal from 1.34s to 1.36s to us is no better than a [Bull trap] and new lows lie ahead. As we’ve stated before many times the recent strength in Euro hasn’t been due to fundamental strength in EU but due to U.S Dollar weakness and this holds true even now.” Second round the actual announcement of the bailout package which as mentioned above has some controversy surrounding it already.

The controversy is the growing consensus towards higher interest rate for Irish Banking system bailout package therefore anything below the expectations of the street which at the moment ranges from 6% to 7% would be a “surprise”. We however beg to differ with the street’s expectation and to us the Irish aid package interest rate wouldn’t be much different from that of Greek aid interest rate at 5%. This then would be a surprise for the street and Euro would quickly find itself at a bid, much like last “Monday”. Euro from its lows of Friday at 1.322s would push back up to 1.329s “the break point” perhaps even managing to trump 1.3300 for a little while. Surprises however do not last long, excitement as a result of a surprise keeps declining perpetually and at that point the mood of the markets shift as everyone realizes the aid package is very much a reality therefore market’s rule of “Buy on Rumor and Sell of fact” which was thus far overshadowed by the “surprise” element would force itself back into play. This is storm cycle 1 of EU debt crisis which will weaken the Euro materially and therefore Euro trading vs. U.S Dollar down to 1.28s doesn’t seem far-fetched anymore.

The other storm cycle is the recent development in the Korean Peninsula. Beijing is the main ally of North Korean regime and South Korea has U.S on its side. U.S has sent its aircraft Carrier USS George Washington with battleships to carry out Joint exercises with the South Korean military. There were joint exercises held in late July which were in response to the North Koreans sinking of the South Korean warship “Cheonan”. U.S Defense Department stated, its intention was to send a strong message to Pyongyang to stop such “warlike” acts. Seems like they didn’t fully understand the message, because had the message been clear which to us seemed more focused towards Beijing than Pyongyang, because Beijing certainly got intimidated as we wrote in our article [Shake of wings] dated July 30th on www.marketprojection.net

“The Chinese Ministry of Defense said that “China opposes any planes and warships that engage in activities that will compromise China’s security either in the Yellow Sea or other seas near China”. And further went on to say “China has indisputable sovereignty of the South Sea and China has sufficient historical and legal backing” to do so. That was China’s side of the story but U.S Secretary of State Ms. Clinton soon gave her statement “that the US has every intention of making certain that global trade is not interfered with in the South China Sea”. This was a brief history lesson between U.S and China which took place over the joint exercises held between South Korea and U.S.

Last week, November 23rd as the North Koreans fired artillery shells on South Korea, soon thereafter Green back found itself at a bid because of its reserve status and because U.S Dollar is considered to be a safe haven at times of turmoil thus further weakening the already weakened Euro. Usually the tension between North and South Korea doesn’t last long and fizzles out over days however, what is of concern here is that South Korea is resisting Beijing’s call to resume 6 party [China, U.S, Russia, Japan, South and North Korea] talks with North Korea.

North Korean won might have been the worst performing currency in Asia vs. the U.S Dollar on November 26th but is it as significant as Euro’s drop of approximately 3.8% last week versus the Green back. And can we discount the heightened tension in the Korean peninsula and turn a blind eye towards Green back being further put on Bid for “safe haven status” and consequently pushing the Euro lower by another 3% from here on? In short and simple, there is absolutely no comparison of the two currencies, won and Euro. China being Pyongyang’s primary ally has a lot to lose if the tension doesn’t dissipate soon but at the same time do we find Beijing bowing down to others demands? Not often! That is not Beijing like!

There you have it. If Euro manages to evade one strike the other strike is right behind. Euro would have to attain “Matrix” like powers in order to get by this storm.

By Bari Baig

http://www.marketprojection.net

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