European Sovereign Debt Crisis Wake Up Call for US?

The American fiscal condition faces a perfect storm. The outlook for the medium term has deteriorated markedly. Some important causes are the Big Recession and the extension of the Bush tax cuts. Nor are the projections cheerful in the long term. In the coming period these issues will come to a head.

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About the author: 
Andy Langenkamp is political analyst at ECR Research in The Netherlands

Inflation or deflation, that is the question

Will the future be inflationary or deflationary?
Whatever it turns out to be will have great consequences for the financial markets. Inflation and deflation are like day and night. As a rule of thumb: inflation means higher long-term interest rates, deflation lower. Inflation is not unfavorable for asset prices such as stocks, while deflation means profits drop and a rapid decrease in demand, leading for example to lower stock prices. Real estate loves inflation, but hates deflation. The picture for exchange rates is even blurrier, as there also the relative performance of various countries and regions is very important. Not all currencies can become weaker at the same time. Therefore, higher inflation in the US than in the euro area, for example, would send the EUR/USD exchange rate to new heights, everything else remaining equal.So, what will it be?

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EUR/USD - Egypt effect likely short-lived

As long as the turmoil in the Mid East stays within bounds, many economists believe that additional dollar weakness is “inevitable”. Mostly on economic grounds. This implies that EUR/USD will keep rising, especially in hopes of a good plan to support the weak euro countries. In addition, the ECB seems more inclined than the Fed to hike its benchmark rate.
Over the coming months to quarters initially we expect EUR/USD to drop toward 1.20. Also because we think that the US economy will continue to improve in the coming period, hand in hand with rising US long-term interest rates (which is good news for the dollar).
Yet higher interest rates could hit stock prices hard (within a few months is our best guess). Owing to an appreciating dollar and falling asset prices we expect many carry trades to unwind. This will boost the demand for dollars. EUR/USD may form a top around 1.38 – or maximally 1.42 – in the near term.

Although many economists expect the EUR/USD to rise further, we believe a drop is immenent. See our reasoning by signing up for a free trial and reading our full report. You can sign up for a free trial here.

Has the correction started?

The gold price has dropped around $40 in recent days. The start of a temporary correction that is potentially significant? As they say, what goes up must come down. Is that now?

You can read our full publication on the matter at our website - ECRResearch.com 

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Our research is read worldwide (literally)

Edin Mujagic, ECR Research's Monetary Economist has had one of his recent publications published in a few of the countries' national news that wouldn't be the first to come to mind.


Guatemala News
The New Times - Rwandas First Daily

Non-Traditional 'Pull Factors' Benefiting Swiss Franc

During the last two months of 2010, the Swiss franc (CHF) appreciated 4.5% against the U.S. dollar and 8.5% against the euro. Overall, the broader CHF index has risen approximately 7%. This strength is surprising as the CHF is generally considered a safe haven. Usually the Swiss currency gains when uncertainty and panic reign in financial markets and when asset prices are falling. As investors’ sentiment has become very bullish and asset prices are increasing, the CHF is therefore not supposed to strengthen.

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About the author:
Maarten Spek: Maarten Spek is a financial markets analyst specializing in interest-rate and currency developments within the G10 economies. He is co-author of ECR's publications on interest-rate and currency developments.

Periphery Countries on Safe Footing in Euro Area

Mention the words "euro area" and "periphery" and immediately almost everyone will associate that with troubles, strikes, indebted nations and rating downgrades, to name just a few flattering possibilities.

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About the author:
Edin Mujagic is monetary and macro economist at ECR Research and Tilburg University. Specializes in monetary policy and the European Central Bank.