The euro zone is standing on the deflation pedal hard enough to turn the euro northward when the portfolio adjustments have run their course, which could be relatively soon.

And the indications of growing exports are more evidence the currency could bottom and start to appreciate.

Like Japan, when relative prices get to where exports pick up it causes the foreign sector to get short (net borrowed) in that currency, which tends to cause the currency to appreciate to the point exports fall off.

The ‘answer’ is to buy dollars as Japan did for many years, and China continues to do. And note how strong the yen got after Japan stopped buying dollars- strong enough to keep a lid on exports. But the euro zone ideology won’t allow the ECB to buy dollars should the euro start to appreciate, as that would give the appearance of the euro backing the dollar.

So right now a euro strong enough to slow exports would be highly problematic for a continent already in the midst of a deflationary spiral with its fiscal authority, the ECB, forbidden to offer the needed fundamental support.

The price of gold in euro could be the indicator of this turn of events. The portfolio shifting has driven up that gold price, and a downturn could be the indication that the portfolio shifting is getting played out.

But for you traders out there- I wouldn’t be early or try to call the precise bottom of the euro.

There’s no telling how much more portfolio shifting lies ahead.

Trichet remains confident in ECB plan
Trichet Says Greek Situation Resembled Lehman Collapse
Trichet: economy in deepest crisis since WWII
Stark Says ECB Measures ‘Only Bought Time’
Weber Says Crisis Response Must ‘Respect’ Policy Divisions
Stark Shares Weber’s View on ECB Bond Purchases, FAS Reports
ECB’s Nowotny Says Euro’s Drop of ‘No Specific Concern’
Lagarde Says Greek Debt Restructuring Isn’t an Option, FAZ Says
Berlin calls for eurozone budget laws
Schaeuble Has Plan to Stabilize Euro
Papandreou Says Greece Is a Good Investment, Handelsblatt Says
Spain puts labour reform on agenda
Italy to Make Extraordinaray Spending Cuts, Minister Says
April EU car sales fall as cash-for-clunkers fades

3 Responses

  1. So far, except for in Greece, social unrest due to the economic downturn has been relatively subdued. How long do you think it will be before social unrest begins to spread to other countries such as Portugal, Spain, Ireland??? Does the rest of the EU see this as a potential problem, do they care?

    I wonder how bad it will get before they realize the need to rethink their strategy on what they can do to get themselves out of this crisis?

    Where is the public purpose of the EU?

  2. Paul M,

    You cannot expect well payed technocrats of the EU, barricated in Brussels to have any fear/sensitivity of people reaction to austerity maesures. They are not elected and not accessed by the castrated European Parliament. Their response is only to raise their power against the voters in member countries as they are already calling to impose penalties upon those that seek to deficit spend and avoid recession.

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