ForEx Word: Market News and Analysis: Europe Regards Neutrality as a Recipe for Success?

Market Leader informed

Over the past couple of weeks the sky above the global economic space has been increasingly covered with storm clouds – it feels as if a huge theater of military operations were deploying worldwide. Some countries are busy strengthening their lines, building defensive fortifications, others maintain neutrality, while the third group is already engaged in local combat. The last category includes Japan whose Central Bank already launched a few attacks by way of intervention to reign in the yen price in the foreign currency market. On the other hand, Brazil has opted for guerilla techniques by silently doubling taxes on capital inflow in the hope that this step will make their national currency stronger. However, the open confrontation between the US and China lies in the epicenter. Americans treat the undervalued Chinese yuan as the source of all trouble and a reason for an imbalance in global economy. Beijing adequately responds that the US itself is responsible for its own problems and that America shouldn’t, so to say, shoulder the blame on China.

Early last Friday Strauss-Kan, IMF Managing Director, voiced a disturbing thought that, essentially, now there are dangerous tendencies that may cause currencies to be used as the main political argument. The outcome of such actions is obvious – all effort related to post-crisis recovery will come to naught. During the forthcoming annual IMF forum, participants from different countries will try and find common solutions to reduce huge global imbalances.

The so-called currency war is nothing more than just consequences of high market volatility resulting from actions of individual countries eager to unreasonably enhance their own exports at the expense of other nations. This negatively affects the system of global trade and draws resentment from investors.

America has ended up in the most delicate situation so far. If the United States continues pressurizing China, the global community may claim that it shoulders the blame for its failures on a country that acts as a generous creditor. So the US has to draw support from the IMF. However, the US has practically nobody left to rely on even under the most favorable of circumstances. Of course, during the meeting in Europe the Chinese Prime-Minister failed to find common ground with Trichet, ECB President, and other European top officials. However, American policymakers remained unhappy that Europe didn’t take as firm a position on yuan’s flexibility as the US. In the context of its own problems Europe has no special concerns on this matter waving away American policymakers as annoying flies. Last year the Euro was weakening, and this became a determinant of the significant increase in exports. Today, however, the Euro invariably grows drawing increasing resentment in Europe. But European analysts point out that this should be a stronger concern for the US rather than Europeans as the consolidated current account of Europe has now reached a relative balance.

As a summary, it could be noted that Europe is pursuing the ostrich policy after it got preoccupied with its own problems and pins its hopes on German exports as an economic cure-all. So, it is not to be concerned with Beijing, to say nothing of yuan revaluation.

Maksim Aleksandrovich Gan (Santyago), Head of the Volume Analysis Department of the Masterforex-V Academy, points out that technically the Euro futures (6E) is finding support above the volume of the current contract at 1.3920 – 35,000 lots. The upwards price dynamics remain in effect until there is a breakthrough down that finds resistance under this level.