The Eurozone grew by only 0.2% in the third quarter, reaffirming the view that the region is potentially slipping towards recession. The omnipresent threat of debt is hanging like a grey cloud over many of the regions nations, exacerbated by low productivity and declining output. This news, however, is not all totally negative; the growth of France and Germany remains steady with only the troubled nations pulling the average to such a low level. These two nations are the largest economically in Europe and have the combined power to maintain growth levels as positive; as long as the spread of debt is contained. Supporting countries such as Portugal and the Netherlands, whose economies contracted in this quarter, is an easier task than preventing the regional distortion of figures by making up for the 5.2% contraction experienced by Greece.
The positive spinoff from a regional recession or at least fears of this, coupled with the contagious spread of a particularly virulent form of sovereign debt is that the regional currency also becomes devalued. When Adam Smith spoke of the ‘invisible hand’ of capitalism he suggested that markets form almost a living entity. The ability to adapt and evolve is one of their most obvious links to this proposition, the natural devaluation of a currency in times of crisis would also makes biological sense if markets could be seen as living, adapting creatures. When currencies are devalued at the most basic level, imports become more expensive and exports appear more competitive. For beleaguered economies, this allows vital competition whilst creating an almost forced austerity until the economic situation improves. Citizens refrain from taking holidays, purchasing foreign items on credit and choose to save rather than spend. On the other hand, nations unaffected take advantage of the cheap exchange rate and place orders for goods.
The Euro has taking an understandable battering from the consistently poor economic news emerging from Europe. The natural response from investors is to place their money into something safe, even though this will not necessarily offer them any substantial gains in the medium-term. Low yield currencies and commodities are seen as safe, non-reactionary and guaranteed. Higher-earning assets, including the Euro and Aussie dollar, offer the potential of larger returns but at the expense of volatility and potential liquidity issues. There is also a fairly large element of self-fulfilling prophecy about this too, and those currencies which are deemed ‘safe’ will, unsurprisingly, rise in times of economic turmoil.
The Euro and Aussie dollar are developing some interesting technical patterns which are consistent with the market sentiment for risk-aversion. The head and shoulders patterns forming on both currencies indicate a downward move if they are to be maintained. This appears as price falls below the neckline and reasserts the opinions of traders that price has tried, and failed, to make three consistent increases. The formation of two lower ‘shoulders’ each side of the higher ‘head’ show dwindling demand and, ultimately, when price falls below the support line it is almost certain to fall further.