Irish Bailout Fails To Support Euro As EUR/USD Moves Lower

It was formally announced over the weekend that Ireland has received a bailout package worth 85 million euros from the European Central Bank, International Monetary Fund, England, and Sweden.  Furthermore, accompanying the announcement of the bailout was a formal announcement that senior bond holders would not have to bear the financial burden of any future EuroZone bailouts. This news was expected to be quite positive for the Euro-area, and specifically for the 16-bloc currency, but trading activity on Monday is proving that market participants are still gravely concerned about the EuroZone situation.  Over the last few weeks, mounting concerns surrounding a possible collapse of Ireland's fragile banking sector has sent the euro and Irish bond yields into a death spiral.  The EUR/USD has collapsed over 700 pips in the month of November, and Irish bond yields are at all-time HI's, as yield spreads between Irish and German bonds increase daily. Recently, Angela Merkel, Chancellor of Germany, came out and proposed that bondholders begin sharing in the financial burden of bailing out EuroZone countries in the future.  When Greece was bailed out, German taxpayers were stuck with footing a large portion of the bill, and this has caused significant political tension within Germany.  Of course, now private German citizen wants his or her hard-earned tax money to be used to finance the wayward spending habits of irresponsible countries, and Merkel and other German leaders have been feeling this pressure from inside their country.  This proposal was met with great resistance in the investment community.  Traders responded by selling the euro. In fact, some economists and analysts believe that Merkel's proposal served as a strong tipping point that helped drive Irish bond yields up to all-time HI's and essentially forced Ireland to ask for a bailout package, even though it adamantly refused a bailout during the first few weeks of trouble. Thus, this weekend's announcement that Merkel's proposal would not move forward and that Ireland had received 85 billion euros in aid was expected to support the euro significantly, but traders are continuing to sell EUR/USD aggressively in Monday trading.  Currently, EUR/USD is sitting at 1.3148 just before the New York session begins trading. Ireland Vs. Greece When Greece faced the very real threat of sovereign default last Spring, the market sold euros like mad as EUR/USD fell from a HI above 1.5000 down to a low of 1.1875 in a matter of 6 months.  When the European Central Bank finally bailed Greece out in May, however, the market quickly reversed course and EUR/USD found strong support.  Concurrently, Greek bond yields fell sharply lower as investors became reassured there would be no default in the near-term.  The EUR/USD bottomed out at 1.1875, and then began an impressive rally up to 1.4200 over the course of 5 months. The response surrounding Ireland's bailout has been quite different, however, which is quite interesting.  The fact that EUR/USD continues to fall in the face of the Irish bailout is a very bad sign for the EuroZone.  Furthermore, Irish bond yields have moved lower today, which means there is increased investor confidence in Ireland, but bond yields are continuing to edge higher in other peripheral nations such as Portugal.  Portugal has long been the talk of traders and economists as the next most likely target of the sovereign default epidemic in the EuroZone. Portugal Could Be Next? Portugal has largely been a non-competitive economy for the last ten years, as the country has grown at an annual rate of only about 1%.  Thus, since the Greek Debt Crisis, traders and economists have been saying it would only be a matter of time before Portugal suffered the same fate.  Now that Ireland has officially been bailed out, attention seems to be turning to Portugal.  On Monday morning, Portuguese bond yields continued to inch higher.  This is quite a destabilizing sign for the EuroZone.  The fact that investors are so quickly turning their attention to Portugal is a bit disheartening for EuroZone leaders. Equity markets are also struggling to gain any momentum in the direct aftermath of the Irish bailout, as the FTSE 100 is down 0.70%, and DAX is down 0.80%, and the CAC is down 1.17%.  The fact that European equity markets are down sharply, the EURO is still being sold off, and Portuguese bond yields are rising higher all adds up to tell us that troubles are far from over in the EuroZone. The most significant risk event of the week will most likely occur on December 1st, which is the next Portuguese bond auction.  That auction should give investors a pretty good idea how the market is going to immediately respond to Portugal.  If there is weak demand for Portuguese government debt and investors demand a high interest rate, then EUR/USD will most likely remain under severe pressure, and it will be confirmed that investors are now fully turning attention to Portugal. It's All About Investors Remember, sovereign default is largely about investor confidence.  For example, the United States has sustained huge, unsustainable mountains of debt over the last few years, but the market is not too concerned about it because of faith in the United States government and its ability to rebound economically.  Many doomsday economists believe there will be a day when investor confidence will be shaken to the point that they begin demanding higher interest rates to hold U.S. debt, and if/when this would ever happen, the U.S. could face economic disaster in the shape of Ireland and Greece.  However, those days are still far away [hopefully].  Those days are not so far away for Portugal, however. If investors suddenly decide they are worried about Portugal and they want higher yields to hold government notes, then bond yield spreads could widen significantly in a very short amount of time, and this would put immense pressure on Portugal.  In fact, the pressure could become so much so fast, that Portugal, like Ireland, would be forced to ask for bailout funds.  If this happens in the near future, EUR/USD could see much lower levels. www.forextraders.com