European Heart Attack

European Heart Attack

Editor Sara Nunnally

The one country that's keeping the European Union alive may be heading for a recession.

From Reuters:

German exports slid in September at the fastest pace since late last year, hit by declining demand among its crisis-wracked eurozone trading partners.

Imports also fell, adding to evidence that the crisis is inflicting a heavy toll on the currency bloc's largest economy.

But trade numbers weren't the only disappointing data... just one in a string of scary reports from the EU's economic heart. From CNBC:

A stream of weak economic figures from Germany is prompting economists to predict that the country is fast approaching a recession -- and the vortex of the eurozone's economic crisis.

Figures released on Thursday showed exports in September fell at their fastest pace since December 2011, and on Tuesday, data revealed that manufacturing and services activity shrunk for the sixth consecutive month in October.

Industrial production figures released on Wednesday revealed a 1.8% fall in September from August, well below expectations of a 0.7% decline.

This spells big trouble for the whole EU. German bailouts have become the lifeblood of the European economy. If Germany slips into recession, it could give the European Union a fiscal heart attack.

European Central Bank chief Mario Draghi said that Germany was no longer protected from the crisis.

Yesterday, from Draghi:

Germany has so far been largely insulated from some of the difficulties elsewhere in the euro area. But the latest data suggest that these developments are now starting to affect the German economy.

And that means more rate cuts could be coming down the pipe. In the meantime, at the ECB November policy meeting, Draghi announced rates would remain at the historically low rate of 0.75% and that the ECB could start up its bond-purchasing program to certain governments if needed.

In other words, the value of the euro is going to nosedive, and soon.

We're already seeing a bit of weakness versus the dollar:

EURO USD Chart
View larger chart

The euro has already fallen below $1.28, which had the potential to be a key support point as we headed into the end of the year, and the dollar would have its "come to Jesus" moment with the fiscal cliff.

But now...

This throws a big kink into the whole forecast.

Thorsten Polleit, chief economist at Degussa Goldhandel, told CNBC, "We're heading for a severe recession in the 17 eurozone member states; we may see a contraction of up to 1.5% in 2013 and becoming more severe, I would say, in 2014."

The EU is going to have a very tough two years, and that does two things that currency traders will need to watch very carefully.

It will slam the euro -- possibly to below $1.20 -- and keep exchange rates anemic.

And it will make the dollar look uncommonly strong... even in the face of the upcoming fiscal cliff.

Let's invert the euro chart above and show you what dollar strength (versus the euro) looks like over the past year.

EURO USD Chart
View larger chart

If this were a stock chart, you might buy this stock, right? Or at least say the stock wasn't performing badly...

Does that equate to how we feel about our economy and the strength of our currency? If you're anything like me, it doesn't.

The problem is, this chart's not lying. The numbers aren't fudged, and even if you believe that the strength in the dollar is just a lot of hot air, if you bet against it, you'll lose money.

One of our other editors wrote me a comment about this idea, saying, "The main reason there isn't any spike in inflation is because we're in a credit deleveraging. Expansions to the monetary base aren't entering the broader money supply aggregates. A weak euro is good... But it's not the only factor keeping inflation at bay."

And he's right... but I think the situation in the EU is a much stronger factor to currency traders than that. And while we may not see an inflation spike in CPI, it's the currency trades that I'm focusing on over the next few months.

I've got my Macro Trader subscribers in a dollar index ETF, hedged with a position in gold. But this dollar ETF could spike pretty quickly over the next eight weeks if Germany slips into a recession and knocks the euro to its knees.

Happy Investing,

Sara

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