Saturday 31/12/2011 8PM GMT 9PM CET

We have been selling the Euro since 1.42 and it's been a great down trend and we hit our first target of 1.30 and now see 1.20 or lower on the cards – any rally in the Euro is a selling opportunity.

The Euro down trend looks set to continue because we are going to see the fiscal crisis get worse not better and we have a very real possibility in the New Year of the problems in Euro zone tipping the whole world into the biggest recession since the 1930s

EUR USD Outlook

Euro Zone  Into Recession or Even Worse

Euro zone, is a zone with no central policy, no treasury, and no unity. The problem is Euro zone is not like USA, and herein lies the problem. The countries all have different agendas, the ECB is not the product of one country and a strong central policy is not in place, to deal with problems in a manner which instils confidence in investors.

Euro zone simply have no policy in place to stop the ongoing fiscal crisis and the recent summit which drafted the idea of tighter fiscal and economic policy was to little to late and does nothing to help the countries which are in the firing line at present – Italy, Spain and even France which if they fall, are to big to save.

Given continued opposition from Germany, a true fiscal union with Eurobonds and a common treasury is Not an option at presentand it really is the only solution but what Germany want she gets but by rejecting this option, if Euro zone is to be saved it will cost Germany a huge amount of capital down the line, when judgement day arrives.

So what do we have in place short term? Well we have a rescue fund which is far to small to save any of the above countries and we have the ECB giving out money ( Quantitative easing in all but name) and as well all know injections of Liquidity cause a currency to weaken and this has been the case in the US and UK and we also know printing money simply creates debt and does nothing really to kick start economic growth.

The ECB recently handed out €489 billion to 523 banks across the 17 countries involved with Italy being the biggest taker this is bigger than either QE1 or QE2 in the US making the ECB's balance sheet the biggest in the world and there will be more liquidity injected. By providing cheap loans to banks, the logic is some will be invested in sovereign debt and loaned to businesses to kick start the economy but this will not be as effective as people think.

Firstly, at present the banks are keeping back most of the money to look matter there balance sheets and it will do nothing to reduce the borrowing costs of nations as its the solvency of nations investors are concerned with. The ECB is gambling that a couple of years down the line, Europe will have seen countries get out of economic difficulties which is a bold assumption and one which we think is wrong.

The austerity measures in nations such as Italy, are to little to late which makes paying debts even harder as economic growth contracts. There is no reason that we can see at present why borrowing costs should decrease in countries such as Italy and Spain which are the major problem countries as we write this report.

We see no solution to the Euro zone crisis and see it getting worse and even if a country does not fall the outlook is grim:

Liquidity injections mean a lower currency and interest rates are falling which will also cement the down trend. Economic growth is contracting in many Euro zone countries and austerity will make this even worse. This is coming at a time when debts are on the increase and the public in many countries is becoming disillusioned with Euro zone policy. The problem in Euro zone is not liquidity in the system, its confidence in the ability of countries to repay debt.

In terms of the Euro, even if we don't see a country tipped over the edge, the outlook is one of misery for many hundreds of millions of people as Europe slips further into recession in the coming year and Euro zone slipping into recession, will affect all major countries in the world and global economic activity will contract.

Comment

This has been a great trend and we have been following it all the way down from 1.42 and we now see 1.32 as good resistance to any rally so look to sell into 1.30 on falling momentum with protection behind 1.32. Expect any rallies to be short, sharp and brief watch for a move to 1.20 in the coming months.

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