Not much in general, but one specific burden they do share; being handcuffed to a currency much too strong in relationship to their own economys competitiveness.
Latvia we all know are in very dire straits, counting on 25% wagecuts to compensate for soon zero exports, imploding growth and skyrocketing unemployment while the currency remains ehhh, pegged, should work? - yeah, right, eat my shorts. Hence, that currency should be released from its "peg" sooner rather than later, which I believe it will, by the force of economics.
The PIGS(Portugal,Italy,Greece,Spain), just like Latvia, has massive issues with its imploding construction, housing and realestate sector and shortterm, its not getting better.
Currency wise, their economies are not tied to a currencyboard system like Latvia, but they are pegged to the Euro. Admittedly, the Euro is a freefloating currency, BUT, the monetary policy is currently more molded on the German economy than the PIGS ones.
With the Euro area in deep trouble, primarily weighed down by the PIGS countries, the ECB, skipper of the monetary policy, is clearly behind the curve.
So far, the implications for the PIGS has been that they are pegged to a currency too strong compared to the Euro zone overall economic competitiveness, and WAY too strong for the PIGS ditto.
You get my drift,,,,
PIGS countries are also risking ending up into the kryptonite deflation pressure cooker as long as the ECB do not err to the proactive easing stance PLUS coordinated fiscal expansionary policies takes hold in the Euro zone.
In any case, this should be another burden to weigh on the Euro currency in addition to the Jpy one (please read the separate piece on the Jpy factor weighing on the Euro as well,"I am short Eur/Jpy and Eur/Usd - here is why", from 12 Jan).
The European monetary and fiscal response contrasts quite clearly with the US one which has been operated in a more proactive way. Europe is lagging US both in economic cycle terms and in a policy response way. Hence, US will likely be the first to emerge from recession when that time comes, while Europe will still be grappling with theirs. Europe needs to shape up if the Euro is going to make it.
With Germany´s Finance minister Peer Steinbrueck expecting Germany´s deficit for 2010 to exceed 4% of GDP due to the new Eur 50 Bn Euro stimulus plan and the GDP for 2008 coming in at a soft 1.3%, the flagship of the Eurozone is not sailing smooth anymore.
Apart from the interestrate markets, where the sovereign bond spreads between the PIGS countries and German ones in some cases have widened to the highest level since the introduction of the Euro, it would seem the market is underestimating the extent of this Eurozone recession, which has been made worse by the minimal policy response.
Unfortunately, although the ECB is expected to cut rates by 50 BP at todays meeting, recent comments seems to indicate that they are looking to slow the pace of easing, despite the very steep fall in economic survey data. If this is the case, count on the Eurozone growth numbers for the coming quarters to be way worse than the most recent 1.6% m/m Industrial production for November.
Focusing on the outlook for todays ECB meeting, from a fundamental point of view, the Euro implications should be negative, no matter if the ECB cuts 50,25 or 75 BP.
From a fundamental point of view, here is why;
# At 50 BP, as long as they maintain the view that Eurozone rates cannot go down much further, the market will sell the Euro, since ECB will then have lost much important credibility at a critical stage. If ECB commits to further rate cuts, intial Eur move will be higher, but the yield curve will steepen, (see 12 Jan Jpy reference above) and Eur will eventually be sold.
# At 25 BP, any comment necessary? Worse than 50BP, total denial by the ECB, Euro sell off.
# At 75 BP, positive in itself for the Euro since it would indicate the ECB is getting a grip. Unfortunately for the Euro, it would mean the Eur 2/10 YR spread would move further towards the important 200 BP level. (see 12 Jan piece referred to above for further info). This would push Eur/Jpy lower, weighing on Eur/Usd as well.
However, having said that, I still believe the market positioning is such that the risk for a short squeeze is quite high. Therefore, I will be light in my directional positioning going into the meeting, relying mainly on options gamma, taking it from there.
Summary; The Euro macrofundamentals are not being supportive for the currency, quite the contrary. This should weigh heavily on the Eur during 1Q. Shortterm, I still see risk for a shortsqueeze in the Eur/Usd and Eur/Jpy due to market positioning, but rallies should be viewed as a selling opportunity. Expect continued high asset and FX volatility. I will be using options whenever feasible.
As usual, Good luck
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