Founder & Chief Investment Officer
At Stallions Financial as we had published our yearly forecast in the begging of January 2012, we had forecasted that this year major currencies like Euro, GBP, Australian Dollar will remain bearish against the USD & Gold will also come under immense pressure as European Crisis will accelerate. We had also clearly mentioned a Potential Exit of Greece from the Euro Zone in 2012 and it seems that we are very close to it.
June 17th the election will take place in Greece where the elected government party (pro bailout or against bail out) will decide if it wants to remain in the Euro zone by implementing the Austerity measures or leave the Euro zone for ever. The question is the Euro Zone & Global economy prepared for a Greece exit?
A Greece exit from the Euro Zone could cost around 1 Trillion USD. Greece accounts for 0.4% of the world economy. A Greece exit could make things so worse, that the Euro Zone & Global economy can fall into a deep recession, run on the banks and further sovereign defaults in Europe can take place.
A deep recession will result in decreasing the purchasing power of consumers, which would mean a tough time for exporting countries like China, UK, Hong Kong Singapore, Malaysia, Taiwan and Korea.
If Greece leaves the Euro Zone it could convey a message to the investors and the whole world that other countries in the Euro Zone can also exit the Euro Zone and cost of borrowing of Spain, Italy & Portugal may reach to new highs. European banks alone hold $1.2 trillion of debt issued by Spain, Portugal, Italy and Ireland, according to the Bank for International Settlements in Basel. Spain, which has about $917.5 billion of debt, has been cut six levels by Moody’s Investors Service to A3 from Aaa in September 2010. Italy , with more than $2 trillion of debt, has been reduced four levels to A3 from Aa2 in October.
Incase of Greece exit Central banks can flood the banking system with cash in order to reduce the impact of it and initially markets and Euro can rally to the up side. But once the market participants will realize that pumping cash in the banking system did not solve the core problem issues, Euro will start to fall again.
The other scenario is that Greece does not departs from the Euro Zone , then troubled banks will need to be recapitalized. How ever this may also not address the core problems until in Debt EU economies start growing.
Gold will also remain under pressure until Europe makes some progress on crisis. QE-3 might be introduced in the last quarter of 2012 but its very early to forecast it as, data out of US is not as bad, at least for now.
At Stallions Financial we forecast that on a break below 1.25, EUR/USD will fall to 1.2000.
We will be looking to sell EUR/USD rallies because we forecast ECB will lower interest rates in coming months and will also take steps for further easing.
“We want to see growth ,concrete plans & policies for growth until then We don’t see any reason to be bullish on the Euro at least for now” Sardar Hassan Ali Founder & Chief Investment Officer at Stallions Financial (Specialized FX & Gold Advisory) & Wealth Management Solutions. (Free Forex & Gold Trading).