The Forex Nitty Gritty

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PIIGS and Forex

Posted by TFNG Admin On March - 22 - 2010  
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The matter of PIIGS and Forex has not gone away. For anyone who has not been watching, PIIGS stands for a number of Southern tier European countries and one island nation with dangerously large national debts. Portugal, Italy, Ireland, Greece, and Spain are all considered to be in risk of default. Because these are Euro Zone countries Germany and France may have to step in and provide loans. This situation has driven the Euro to new lows.  Debate ranges back and for on the subject of Forex and sovereign debt. Now England’s debt is calling its creditworthiness in question so the Pound is falling along with the Euro.

Traders are making comparisons to Greek debt and US debt as a fraction of GNP and wondering whether to discount the Dollar or the Euro based on debt. As usual Forex trading and opinions go together like jam and bread. Those who saw this coming have profited handsomely by betting against the Euro. Now the question is if the excessive debt of US states will cause a bailout making factors influencing the EUR/USD pair reverse and send the dollar into a slide.

For the astute trader your Forex strategy and the Forex news are not always on the same subject. For example Forex trading and the Dubai financial crisis was at the top of the news recently. PIIGS and Forex pushed this matter to the back pages. It should not remove this issue from consideration in Forex strategy. When the recession hit governments around the world responded by pumping money into credit markets, bailing out ailing banks, and even taking shares in financial giants like Citigroup to stabilize the financial markets. The effects of this unheard of amount of debt will be with us for generations and should be considered in Forex trading. Even large national matters such as Forex and health care affect national debt which in turn affects currency values. The issue with Dubai is not so much their debt but who will have to write off their loans.

As usual commentators are predicting the end of the Euro and the end of the European Common Market. Beware of extremes when formulating your Forex strategy. If the Euro goes away it will not be there to trade. However, there are too many good reasons for the European nations to continue to work together for the Common Market to fail. Because of these we can expect to see recurring situations like the current PIIGS crisis where Germany and France will need to step in to bail out their trading partners. In the meantime get used to the news of labor unions in Greece taking to the streets to complain about cuts in social benefits. In matters such as PIIGS and Forex remember that those who extend credit (Germany and France) will always require at least a show of fiscal austerity for their money. Good Forex advice is to ignore a lot of the daily sensationalism except as part of the bigger picture. Those who understood the debt situation and the political climate in many European countries saw the drop in the Euro coming and profited as it slid down in value. Those with technical expertise with Forex double bottoms saw the rebound of the Euro and went long on the Euro just in time. Those who understood that the EU is not going to disappear understood in advance that the Euro would come to a lower boundary and reverse despite PIIGS and Forex.

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