4 REASONS THAT EURO IS NOT CRASHING AT THIS POINT.  ---By Shan Saeed

BLOOD IN EUROPEAN MARKET

The game is getting messy. Players are going back home. I see blood in the financial markets for the next 2 years. I would not be surprised if JP Morgan meets the same fate like Lehman Brothers in the next 2-years. Euro is still holding on. Countries like Greece, Italy, Spain have become parasites for EURO ZONE. Euro single currency has not crashed or gone bonkers even in these turbulent times. 


Based on a swap-spread-based model, EURUSD should trade around 1.30, but based on GDP-weighted sovereign credit risk EURUSD should trade around 1.00; so who is right and what are the factors that supporting the Euro at higher levels than many would assume (given the rising probability of a Euro-zone #fail and the 0.82 lows from 2000). The main issues confronting the euro single currency is holding back from crashing are 4. The four key reasons for the apparent paradox based on the difference between ECB and Fed 'monetization', the EZ's balanced current account (independent of foreign capital flows), and the high-oil-price induced petro-dollar circulation diversifying into Euros (or out of USD). The final and most telling of factors though is bank deleveraging as European financial entities, who remain under pressure to shrink their balance sheets and re-build capital, have been selling foreign assets. They remain EUR dismal with a year-end target of 1.15 but expect the slide to these levels to be cushioned (absent an imminent break-up) by banks' 'shrinkage'......

Financial markets are starting to price in the risks that the Eurozone may split apart following this month's inconclusive elections in Greece. But the euro, while trading back to this year's lows against the dollar at 1.27-1.28, remains far above its lifetime lows of 0.82 recorded in 2000.

PARADOX EXPLAINS 

First, the European Central Bank so far has not engaged in outright quantitative easing during the financial crisis. Moreover, while the Federal Reserve, the Bank of Japan and the Bank of England all have cut interest rates to between zero and 0.5%, the ECB's benchmark interest rate remains at 1.0%. In contrast, investors are concerned the Federal Reserve will engage in a third round of quantitative easing. FED will start QE3 soon and Gold prices will moves above mountains. Similarly, the Bank of Japan and the Bank of England have also been printing money and buying government bonds.

Second, the Eurozone as a whole runs a balanced current account. Thus it is not dependent on foreign capital inflows to support the value of the euro.

Third, high oil prices have increased the petro-dollars accumulated by central banks and sovereign wealth funds in the Middle East, North Africa, Commonwealth of Independent States and Norway. These official investors diversify a portion of their new foreign reserves into Eurozone markets.

And, last, Eurozone banks are under pressure to shrink their balance sheets and rebuild capital have been selling foreign assets. And who will buy these european assets. Asian countries like China, Singapore, South Korea, Malaysia and Japan

Disclaimer: This is just a resrach piece and not an investment advice. All financial transactions carry a RISK