DSIJ Mindshare

SHAKINGS AND STIRRINGS IN THE EURO ZONE

Euro, the shared currency of the European Union, is currently languishing near a 12-year low level against the US dollar, largely due to concerns over Greece’s exit from the region. After a dismal performance in 2014, wherein the euro lost its value by 12 per cent while the dollar gained footing following the termination of a monetary stimulus by the Federal Reserve, the year 2015 followed suit as worries over a possible default by Greece might result in its exit from the 19-nation euro zone.

The ongoing financial crisis in the Greek economy has created a knock-on effect in the entire euro zone. This crisis was initially triggered by a drastic increase in the country’s payroll coupled with poor collection of taxes and handsome repayment of pension funds to individuals, which left Greece with no monetary resources to support its economy. It thereby has had to depend on its neighbours for funds.

Several European Union countries and the International Monetary Fund came to the rescue of Greece and provided it with a Euro 110 billion bailout on the condition that Greece implement severe “austerity” measures including deep government spending cuts and wage lowering. The adoption of these measures led to a sluggish Greek economy and a second bailout of Euro 130 billion which had been agreed upon. The disbursement of the money was divided into tranches to be paid out between March 2012 and December 2014, in parallel with the completion of reforms that are crucial to the revival of Greece’s economy.

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Currently, Greece is struggling with a new list of economic reforms, to be submitted to the creditors and then negotiate a bailout extension which would unlock Euro 7.2 billion for the country and help tide it over for a few months. Although Greece has made a Euro 460 million (USD 495.82 million) repayment to the International Monetary Fund (IMF) on April 9 this year - a relief for the country and its European creditors – there’s no doubt that funds are running dry and one of the other major bills coming up for payment on May 12 of Euro 767 million to the IMF will cause a default if those bailout funds aren’t forthcoming.

Starting March 9, the ECB started buying government debts of Euro 1.1 trillion (USD 1.2 trillion) and finally initiated a quantitative easing (QE) program that had been announced in January. Following this program, the euro zone witnessed a remarkable turnaround in the economy’s fortunes as growth forecasts have continually been revised upwards since January 2015. Moreover, the International Monetary Fund said it now expects the euro zone to grow by 1.5 per cent in 2015.

The after-effects of QE have been surprisingly positive. Related data showed that YoY inflation was just - 0.1 per cent in March and just nine out of the bloc’s 19 members are in deflationary territory, down from 17 in January this year. Another sign of the monetary policy measures having turned out to be effective is that consumer confidence has been at the highest level since 2007. The euro zone economy is widely expected to revive after years of stagnation and recession due to boost from low oil prices, a weaker exchange rate, and the ECB’s massive Euro 60 billion (USD 64.84 billion) a month program.

However, uncertainty regarding further repayment by Greece and a decision over its reforms will prove critical for investors as it may provide clues to future course of action. Further, a decision regarding the US’ rate hike remains ambiguous and is likely to keep a watch on gains in the euro.

Strategy: Buy NSE EUR/INR between Rs 68.40 – 68, SL – 65.80, Target – Rs 73/74 (CMP – Rs 68.87)

Currency Support 1 Support 2 CMP Resistance 1 Resistance 2

EUR/USD 1.05 1.022 1.0824 1.13 1.175

Disclaimer: The above opinion is that of the author and for reference only.

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