Wednesday May 25, 2005 - 11:12:54 GMT
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Black Swan Capital - www.blackswantrading.com
More evidence euro overvalued
“But the most difficult question is how we can get hold of definitions or basic premises, and make sure that they are correct—that we have not erred, not grasped the wrong essence.”
“Interest rate spreads within the eurozone are tiny. Investors apparently consider the debt of the eurozone governments as close to perfect substitutes. This is astonishing: after all, ratios of government debt to gross domestic product at the end of last year varied from Luxembourg's 5 per cent and Ireland's 29 per cent to Italy's 105 per cent and Greece's 112 per cent (on the Maastricht treaty definition). Investors must not only believe that the currency union is impregnable but that each sovereign borrower is as good as the other,” writes Martin Wolf, of the Financial Times.
Mr. Wolf asks: Can the eurozone disintegrate? He answers: Yes, but highly unlikely. What worries him the most is the fact that all debt among the nations within the eurozone is considered equal. The system could be severely tested in a major default—or hint of default. But the system does not properly price this risk. It speaks volumes about the lack of credibility of the monetary union that underlies the euro itself—we think.
The fact that people are contemplating the viability of the eurozone is probably a good reason to believe that Asian central banks will play “wait and see” before they reallocate reserves away from the dollar and into the euro; which was a foregone conclusion by many among the assembled punditry.
So, if we take the central bank reallocation argument off the table. And we stick to our view that China “revalues” later, rather than sooner. And if we consider US economic growth, warts and all, is crushing the eurozone. And we sprinkle in the little we think we learned yesterday from the FOMC minutes—the Fed will continue to hike rates. What are we left with?
We think we are left with a currency that appears extremely overvalued against the greenback.
Black Swan Capital
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