Euro Consolidation Overall Bullish

6 February, 2012


Euro Consolidation Overall Bullish


Australian Dollar Continues to Fly



Concerns about Greece remain over inflated, but also a lot of bears finally gave up and started to get long the Euro recently. The Euro may therefore be a little top heavy in the short term, but the overall up-trend is highly likely to resume following this short term consolidation phase at current levels.

This is not to say that Greece is not at yet another tipping point, but that while there will be some last minute posturing by various leaders within Greece so as to maintain voter support, the final discussions though tense, will nonetheless be successful. I have to make the point though, as conditions in Europe are incredibly icy, and this freeze will do nothing for Q1 GDP, as the union as a whole will be significantly impacted, let alone discussions with Greece, that a default scenario is extremely bullish the Euro should it occur.

The Euro will rally strongly despite improving employment in the US, as all the bad news, and it is argued here a dis-integration scenario that was never going to happen, is already priced in the Euro. Therefore the upside potential for the Euro upon agreement regarding Greek funding requirements is extreme. Furthermore, should Greece default, it will eave the union immediately, and this would allow the Euro to rally strongly as well.

It is very cold in Europe and this serious weather situation will take the wind, what there was, out of the sails of economic growth this quarter. Yet it will still be the force of the unwinding of an overly bearish sentiment, that is likely to dominate in coming weeks and months. Therefore we still look for further strong gains in the Euro over the medium and long term.


The Australian dollar is resolute in its rally, and why wouldn’t it be. The whole world is set to prosper in 2012, with only Europe to be moderate. The demand for commodities globally, and especially in Asia, is likely to increase significantly, and at a greater rate than new reserves are discovered.

The pricing in of this continued global prosperity, as well as the decline of commodity reserves, has only just begun.  It is not difficult to figure out that the Australian dollar will continue to rally. Though in the short term one must be a little cautious, as we have reached a point where even the previous bears are now joining the bullish camp. This is always a sign that an unexpected downward correction may be afoot.


The Reserve Bank will I believe leave rates on hold, for the reasons I have provided in recent days, rebounding resources demand, and only a short passage of time since the last rate cuts. There is no doubt the RBA should cut rates, but whether they do is another matter. Nevertheless should the RBA cut rates I would expect this to only generate a short term pullback for the Australian dollar. Such pullbacks though brief can occasionally be significant in price. With the bears only recently having moved to long positions there may be some short term vulnerability in this regard. Should the Australian dollar experience any pullback whatsoever, it would be something that exporters and savvy traders alike should take full advantage of.

The end of year target I set at parity at the start of the year of 1.1300, was upgraded to 1.1700 when the currency quickly achieved 1.0500, and this revised forecast remains probable.

Clifford Bennett
Chief Economist
White Crane Group

Sydney, Australia.
+61 (0) 423 950 427
clifford@whitecranegroup.com.au
www.whitecranegroup.com.au