Euro Under Assault as Austrian Banks Crumble

Last updated 12/15/2009 3:53 AM ET (GMT -5) 11 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Euro was under relentless assault in early morning European trade today, after reports on the website http://www.benzinga.com suggested that Austria may be the latest trouble spot for the credit crisis spreading throughout the region. The Austrian regulators have already nationalized Carinthian Hypo Alpe Adria Bank AG and speculation is mounting that Austria’s fourth largest bank Oesterreichische Volksbanken AG (OeVAG) may be the next to be rescued.

OeVAG which reported an accumulated loss of 607 million euros in the first three quarters of this year has a balance sheet of 53 Billion euros. Investors are concerned that credit writedowns could skyrocket to 20 Billion euros on the loan book of Austrian banks putting massive stress on the European financial system.

The euro tumbled below the 1.4600 level for the first time since October 5th as the single currency suddenly became a toxic asset of its own, with traders loathe to buy it until further clarity in Austrian banking sector can be established. The unit has now come off more than 500 points from its yearly highs as concerns over the fiscal integrity of the European financial sector along with better than expected US economic data have markedly changed the dynamic in the FX market in favor of the dollar.

FX traders will now look to the ZEW survey due at 10:00 GMT for latest data point on the state of the Eurozone economy, but if the report disappoints, the combination of weak economic data and heightened fears over another possible credit crisis in the European financial system could easily drive the pair below 1.4500 figure before the day’s end.

Comments (11)

hsbc

December 15, 2009 at 04:36 AM ET

dragon has to be hurting big time

alexjbrandt

December 15, 2009 at 05:51 AM ET

I'm still dollar bearish, euro bullish long term. The dollar rally over the past two weeks has been impressive and will probably continue for the immediate term if 1.4500 is broken. I look forward to January's NFP, when all those temporary seasonal workers are laid off because I think spending won't be as robust as retailers are thinking it will be. I'm still debating whether this is a correction or if a new trend is being established. At least the AUD, NZD have been resilient in resisting the dollar appreciation. I am still bullish on the AUD, NZD.

jet

December 15, 2009 at 07:02 AM ET

got some of hsbc's money lol you're next alex i will enjoy spending your money :) BIAS is a dangerous thing

jet

December 15, 2009 at 07:11 AM ET

sorry hsbc i meant dragon

alexjbrandt

December 15, 2009 at 08:09 AM ET

No one is taking my money, the government already has it all and is spending it away like crazy! lol :P
My bias stems from my skeptism of the November NFP report, and I don't 'follow the crowd'. Reason why I'm skeptical is that the state I reside in (oregon) which has a unemployement rate of 11.1% has not declined in the last three months (after increasing before that) Sure conditions vary state to state, but with weekly jobless claims report last week increasing , and the number of people recieving less benefits now, does not seem indicative of an economy in which we will see spending increase. Sure retail sales increased 1.3% for november, but thats with the two biggest shopping days of the year in that month. It will be interesting when the December data comes out in January.

schultzz.at

December 15, 2009 at 07:53 AM ET

I agree with alexjbrandt on the U.S. labor market. Even with positive NFP numbers the unemployment rate will not come down significantly as discouraged workers reenter the labor force. Assuming that core PCE price rises will remain small the Fed will keep the funds rate near zero in 2010.
Consequently, short term rate differences will not support the dollar.
However, the euro area economy has lost competitiveness relative to the U.S. With unit labor costs up 3.2% Y/Y in the third quarter as reported by Eurostat compared with -1.4% for the same period in the U.S. as reported by the Labor Department.
It may be feasible for European or Japanese corporations to shift operations to the U.S. when producing for the American markets. Of course, this issue is highly political.
The biggest U.S. banks will soon have repaid TARP funds. Even if these banks will continue to suffer from loan losses in 2010, a meltdown of the U.S. financial system has been avoided and the banks have been returned into private hands. On the contrary, taxpayers in continental Europe and the U.K. still hold stakes in many banks and I expect more 'gifts' in 2010. When talking about the HGAA disaster we arrive at the German Landesbanken abyss. Bayern LB was the owner of HGAA until they donated it to the Austrian taxpayer yesterday. I also have to mention Landesbank Baden Würthemberg, HSH Nordbank and WestLB.
As far as Greece is concerned a shrinking economy and rising financing costs make a EU/IMF bailout very likely.
To sum it up, I am quite sure that the U.S. economy will suffer from 'Eurosclerosis', i.e. high unemployment despite a growing economy. However, structural problems of its Japanese and European trading partners make U.S. assets comparatively attractive. I am unambiguously bullish on the dollar versus the euro, yen and pound.

alexjbrandt

December 15, 2009 at 08:38 AM ET

Depsite the big banks getting bailed out and surving, the little guy is still hurting. 133 bank failures so far for 2009. Mostly regional to local banks, the FDIC is expecting bank failures to accelerate/peak in 2010. Coupled with the Fed's massive ledger balance, government massive debt, and the trade deficiet, I only see one way the dollar will go on a long term basis.

schultzz.at

December 15, 2009 at 11:41 AM ET

The dollar may go up or down on a long term basis. Macroeconomic, political and (market) psychological factors will affect its value versus other currencies. However, U.S. citizens seem to have a bias for one side of the equation EUR = USD. This is particularly true for well known critics of the U.S. fiscal and monetary policy like Jim Rogers or Peter Schiff. My personal assessment is that traders are under pricing the risk on the Euro side.
The Euro is a political project driven mainly by former European Commission president Jacques Delors. Delors wanted to contain German economic and political supremacy, and the Euro was his great vision. The German Bundesbank was skeptical about the fiscal discipline of 'soft currency' nations like France, Italy and Spain. It was appeased by the 'stability and growth pact' obligating Euro nations to a budget deficit below 3% of GDP and a debt/GDP ratio below 60%. According to a European Commission forecast the average euro area deficit will be at 7% GDP, the average debt/GDP ratio will stand at 80% in 2010, unemployment will reach 11%.
The Euro is definitely great for tourists and also as a political symbol for European unity. Is it also a great thing from a macroeconomic perspective? I am not sure. We have 16 governments and 16 bond markets. The ECB has to manage monetary policy for a country with 3.7% unemployment in October 2009 (the Netherlands) as well as for a country with 19.3% unemployment (Spain). Concerning the potential default of a euro area nation, there are simple no legal tools to handle it on the EU level.
U.S. traders should not be surprised watching their currency go up against the Euro despite a Fed balance sheet of $2.5 trillion, a budget deficit of $1.4 trillion/year and a current account deficit of $400 billion/year.

FXDragon

December 15, 2009 at 09:02 AM ET

I keep two sided positions for every pair. I guess i'll take profits on shorts at 1.45 and go long. It's good the correction was deep, we'll have a pippage party on rallies. Look at pairs other than eurusd to see no trend change. They still offer good range trading. Fed probably knows early rate hike will lead to recession.

FXDragon

December 15, 2009 at 09:15 AM ET

Hopefully usdcad(descending triangle) and usdjpy will break to the down side after fomc mtng. Pray for me guys:) Good luck...

tjbab

December 15, 2009 at 12:18 PM ET

I am going to stay Euro bullish I have written before I think the labor and sale markets will change after the holidays are over.And the fact that the senate wants to spend 1.1 trillion dollars on top of health care costs is not going to help matters any
HAVE A GREAT HOLIDAY EVERYBODY

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.