Ahead of QE, Euro Crushed Under Oil And Greek Drama

Euro began trades on the first week of 2015 by plummeting to its lowest in nine years yesterday (5/1).

Euro began trades on the first week of 2015 by plummeting to its lowest in nine years yesterday (5/1) after European Central Bank statements left people wondering whether ECB Quantitative Easing is imminent. The announcement of Switzerland's upcoming negative rates last December have raised speculation that ECB will launch QE in its first meeting this year at January 22nd. That, and the latest ECB prez statements have added to the belief that QE will be announced soon.

However, apart from that, there are other factors that push Euro lower and discount investors confidence in it. Some of them are falling global oil prices that has just break through 50 USD per barrel and rumour that Greece exit from the Euro (Grexit) is on the horizon.

Crawl Under 50 USD

World oil prices have fallen around 50% since June 2014 and increasingly worrying because OPEC and Non-OPEC oil producers refused to cut production even though global demands dropped. In Monday, oil prices breaks through 50 USD per barrel for the first time in more than five years, with US WTI for February delivery at 49.95 USD, Brent oil at 52.66 USD, and New York oil at 50.27 USD.

Illogical descent of world oil prices have been credited by some sources as beneficial for the Eurozone, but the view is doubtful. Chief of Germany central bank, Jens Weidmann, said to Frankfurter Allgemeine that cheap oil may function like stimulus and enable people to spend less on consumption, more on investment. The comment is consistent with Weidmann opinion that on ECB Quantitative Easing plans; if cheap oil can improve Euro economies, then QE is unnecessary. But Jacques Cailloux from Nomura said to New York Times that weak demands behind cheap oil prices actually might hurt the Euro instead due to their dependence on trades. Cailloux pointed to the fact that oil producer countries are target exports for Germany and other Eurozone countries. The drop on world oil prices that have pushed those countries to the edge of crisis potentially cut down demands for Eurozone products, as what happen in Russia.

On Edge Of Deflation

Meanwhile, inflation in the Eurozone become increasingly alarming. German inflation figure for December 2014 (year-on-year) dropped from 0.57% to 0.2%, yesterday report said. The figure is the lowest since October 2009, and mainly caused by tumbling energy prices. The fact showed us that world oil prices possibly worsen Eurozone inflation in short term.

German Inflation Figures 2009-2014

Other Euro area countries is no better. Spain has scored straight deflation in the second half of 2014, with December inflation at -1.1%. While France November inflation was just 0.3%, and Italy only able to jot down 0.19%. The situation points to the condition where low oil prices benefit for the Eurozone, if any, is not happening now; instead, cheaper oil pull the region nearer to the edge of deflation with higher unemployment.

Greek Tragedies

On the other hand, Euro is also dragged by Greece's never-ending turmoil. Political uncertainty has risen with the necessity to hold snap election in January 22nd. The root of the problem is that the current most popular party to win the election, Syriza party under Alexis Tsipras, is also the one party that opens up the possibility of Greece default and Greece exit from the Euro.

Alexis Tsipras Of Syriza

When debt crisis wreak havoc in the Europe a couple of years ago, Greece was bailed out two times by the European Union, mainly Germany, and the IMF. The bail-out was agreed along with austerity clauses that has inflict hardships on the Greeks, including major wage cuts. Tsipras in a populist move have declared that if Syriza wins, then the government will quit the bail-out terms at that moment. Tsipras's rival, Prime Minister Antonis Samaras from the current ruling New Democracy party, warned that Syriza wins mean that Greece most likely will default on its debts and consequently go out of the Euro.

It needs to be noted that during the lats crisis, Greece have effectively gone bankrupt. Not only bearing the burden of huge debts, the former center of civilization did not even own sufficient funds to pay back those debts. If common people experienced that kind of crisis, most certainly he would apply for bankruptcy and got his assets taken over by the courts; but as a legitimate sovereignity, Greece could not be treated that way. Therefore, an alternative was taken to restructure previous debts, lent additional funds with low interests, and several terms and conditions to enable the country to fulfill its responsibilities.

If Syriza wins and those bail-out terms and conditions are breached, then what will happen is anyone's guesses. As a country, Greece most certainly lost credibility. Also, although Syriza said that they will keep Euro membership, but market doubts whether Euro will allow the country to violate a vital agreement. If it is assumed that Eurozone main forces open for renegotiation, then it will be a bad precedent that might be followed by other Euro periphery countries and potentially hurts Germany.

Rather than hurting, German that previously lent majority of the bail-out funds was reported to be ready to kick Greece out of the EU. Leading German media, Der Spiegel, on weekend quoted anonymous sources from with the government that Germany believes Eurozone will survive a Grexit. Councillor Angela Merkel and Finance Minister Wolfgang Schaeuble was said to consider Eurozone have implemented considerable reforms since the 2012 crisis so that the danger posed by a Grexit will be limited. But if Greece gets out of the single currency, it might also be followed by others, notably Italy and France, that has felt the most burden in the EU.

Either way, Euro will be in huge turmoil if Syriza wins the election. The many uncertainties are enough to depress the 18-countries currency. The pressure goes further due to stronger US Dollar ahead of the release of The Fed FOMC minutes and US NFP reports later this week. Consequently, voices arise that questions whether analysts were less bearish in predicting the Euro course this year, pointed to the fact that Euro has slowed down even further since the opening of financial market this year although Quantitative Easing is still uncertain.