Saturday 26/11/2011 9PM CET

The Euro is dead in its current form as we have said for months. There will either be a disorderly break up or policy makers will wake up slim down the zone in numbers and move to closer fiscal, economic and political integration. We need the crisis to go a but further though until policy makers are forced to act and that means the Euro below 1.30.

Were short the Euro from way back on the move up to test 1.42 and at that time when we entered we expected a move below 1.30 and were pretty close now and think it could actually fall a lot lower. The Net traders positions last week showed a huge number of speculators short and this weeks report ( delayed due to Thanksgiving) will show the same.

This means, we need a rally to flush out weak speculators and correct the oversold condition and we expect this next week. Longer term though the Euro in its current form is dead and policy makers need to wake up to this fact.

Borrowing Costs Continue to Rise

The euro fell to seven-week lows against the dollar on Friday as borrowing costs to new euro-era highs which added to the gloom after a poor German bond auction, where 40% of the offer was not taken up.

Italy's two-year yield went up to a euro era high above 8 percent and 10-year yields was above 7 percent, a level that is seen as the danger number after Ireland, Greece and Portugal all sought help after this level was exceeded. Spain is paying high rates but also lots of other countries who were not in the firing line such as Austria and with Germany's bond auction flopping, confidence in the zone is evaporating.

As the crisis deepens, the ECB is coming under pressure to do more but the problem is Germany doesn't want it as a lender of last resort. France agreed to stop pressuring the ECB to print money last week but policy makers signalled they are willing to offer cash-strapped banks more liquidity if needed.

The ECB Needs to Act to Stabilize the Euro

The ECB is needed to restore confidence as the rescue fund is a joke – its to small now, to small when leveraged and policy makers have not even decided how it will be leveraged up which just shows how slow European leaders are in responding to the crisis. They continually think things will just get better and have let the situation get out of control and we need to see confidence restored soon or we will see a big nation which cannot be saved such as Italy or Spain go over the edge.

Germany a Change of Attitude Coming?

Euro zone as a whole is in recession and there are signs that Germany will in recession by the turn of the year and this may persuade them to change there stance on using the ECB as its postion worsens.

With Germany moving into recession, both Bundesbank and public objections to more dynamic action should subside as they will see it in there vested interest to save the Euro. Euro overnight rates will then be low enough to make quantitative easing an option. When this happens, we would expect there to be a radical shake up of Euro zone as countries leave of there own accord or are pushed and the rest of the zone comes closer together on an economic, fiscal and political level. This is the best option, the worst case of course is a big country going down and plunging financial markets into turmoil.

What ever happens there is going to be no happy ending and our original downside target in the Euro looks conservative now and it could easily trade longer term back to 1:1. Slow and a divided policy response have left a small problem get larger and the sheer incompetence and arrogance of Euro zone leaders, will cause a huge number of decent hard working people to face years of hardship.

Comment

On a technical level we are short at 1.42 and have seen a great decline and we have been banking 50% of our profits on the way down and selling rallies and we moved to do this on Friday AM. We Want to sell a rally and get our banked profit back in but how far will the rally go?

We would expect, if we can hurdle 1.33( which we think we will) to see a run at 1.34 and we would look to sell on any signs of falling momentum, with stops behind 1.36 which is the mid BB. If this rally occurs, we would expect the Euro to fall to not only test 1.30 but break it and as we said earlier, the way things are going in euro zone, we could easily see it at 1:1 in the coming months.

Look to get into this great trend and hold it there looks a lot more downside to come.

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