Tag Archives: euro

Long Euro

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I’m not a believer in manipulation, so I’m not counting on the central banks of the world to drive down the dollar. It’s as simple as 2% bulls: as of late last week there were 50 euro bulls for every bear. I always like to be the lone nut.

EUR.USD is looking very oversold at the moment by RSI, also. I’m still a long-term euro bear and would not be surprised by parity or $0.85, which actually looks all the more likely now that euroland is going to print away to relieve its banks of their bad bets on GIPSI bonds.

Good Faber interview on Bloomberg: manipulation, GS, Fed, Greece, etc

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He basically expresses my opinion when it comes to manipulation: the Fed manipulates interest rates and bails out banks by accepting crappy collateral and buying bonds, and of course things like FX swaps manipulate that market. GS and others may front-run, but he doesn’t seem to believe in the futures/PPT theory of manipulation. He and I agree that poor traders use that as a mental crutch when they get frustrated.

Lots of other topics are covered, including Greece (he calls it a write-off, and says that the bailout of course was of the European banks, not Greece, which can never pay back its debt).

Watch the video here.

I thought the bailout was supposed to save the Euro.

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In government and mainstream media logic, the bailouts are supposed to be good for the euro. With EUR/USD pushing 1.27, it appears that somebody forgot to tell the market that implied guarantees for GIPSI nations to the tune of 100s of billions of new euros should strengthen the value of those in circulation.

Here’s a 10-year view of the spot market, revealing just how much downside there is in this cross. On the other hand, the euro is getting oversold on a short-term basis, with RSI approaching the conditions preceding the short but violent rally in late ’08. It could trend a little while longer, but don’t get caught short without your stops.

TD Ameritrade

Silly Greeks

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Those government workers don’t seem to get it: they’re on the same side as their politicians and the foreign bankers. They should all support the bailout and austerity measures, since this is the only way to keep the racket going a little longer. It’s the taxpayers who should be storming parliament and demanding default (just like in the US, UK, Japan, etc)!

Also, it makes perfect sense for the euro to tank on this news — Europe just tipped its hand that it’s likely to print 100s of billions of euros to bail out all these GIPSI nations.

Greece defaulting would be good for the euro, deflationary — 200B in euro balances would go POOF! Even if all the GIPSIs dropped out of the euro, which they would NOT have to do even if they defaulted, the euro could strengthen. In the end, if everyone but Germany defaulted and dropped out of the eurozone, it would be a hard currency and they could just call it the Deutsche Mark again.

Europe agrees to bail out Greece, sets precedent for euro’s destruction.

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So we finally know the structure of the Greek bailout. 16 EU nations pledged to throw good money after bad and extend taxpayer-financed loans to Greece when the country starts to default. From Bloomberg:

March 16 (Bloomberg) — European finance ministers laid the groundwork for a financial lifeline to debt-stricken Greece, breaking a taboo against aid to cash-strapped governments in order to avert a crisis for the euro.

Officials from the 16 countries using the currency worked out a strategy for emergency loans in case Greece’s plan for 4.8 billion euros ($6.6 billion) in tax increases and wage cuts fails to stave off fiscal disaster.

“We clarified the technical arrangements that would enable us to take coordinated action which could be swiftly put into place in the event it is necessary,” Luxembourg Prime Minister Jean-Claude Juncker told reporters late yesterday after leading a meeting of euro-area finance officials in Brussels.

With the euro undergoing the harshest test in its 11-year history, the unprecedented pledge reflected concern that Greece’s budget woes could spread, poisoning investor confidence and aggravating the currency’s 10 percent decline against the dollar since November…

…“The objective would not be to provide financing at average euro-zone interest rates, but to safeguard financial stability in the euro area as a whole,” the ministers said in a statement.

Of course almost everyone has it wrong about the implications for the euro. Sovereign defaults would be good for the euro, even if those nations end up leaving the monetary union for their drachmae, lire and pesos. Defaults are by definition deflationary, since they reduce the amount of outstanding credit balances, thereby increasing the value of the remaining euros. If everyone but Germany defaulted and left the EMU, the euro would be stong and they’d call it the Deutschemark again.

This is the dynamic that has propped up the strong Yen for 20 years even as the government has run up huge debts, and it is the same reason the dollar finds a bid whenever panic enters the financial markets. In a credit crisis, the very condition of having piles of debt denominated in a currency creates demand for that currency by both debtors and creditors.

What these bailouts are going to do is reduce the relative demand for euros and likely result in an accommodative ECB printing up hundreds of billions more. The politicians are lying or ignorant or both when they say that their goal is to save the euro — this is nonsense. Their goal of course is to save the bankers who own them.

The Greek taxpayers of course, if they have half a brain and some guts, should refuse to service this debt and simply force an honest default. All of Europe is conspiring to make them debt slaves forever, and the only Greeks who benefit are the political gangsters and government unions.

Loaded for bear

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Graphite here.

Although it’s easy for this kind of contrarianism to turn into unhelpful navel gazing, on Friday the level of despondency seemed to hit a new high (or is it low?) on the bear blogs. Posts and message boards are chock full of buzz about perpetual asset inflation powered by the Fed’s magical money machine and an ample supply of that tricky thing called “liquidity.” Visions of the 1990s and 2000s are offered as proof that the market can disconnect itself from any fundamental or technical backdrop and power to endless new highs. The January highs are trotted out as “points of no return” for the bears, as though the market is guaranteed to launch higher if it manages to cross that threshold. And with the market seeming to shrug off every negative news item from sovereign defaults to bank failures to continued hemorrhaging of jobs in the U.S., traders are unable to conceive of a “trigger” that could send stocks lower.

Meanwhile, take a step back and look at the technical picture the market is presenting at the moment. After a several-week buying frenzy in stocks, we have new highs in the high-beta Nasdaq and Russell indices, unconfirmed (so far) by the Dow and S&P. Friday’s 5:1 NYSE a/d ratio was cause for concern, but hardly a match for the 35:1 down day seen in the February selloff. The 17 handle on the VIX shows complacency in the option market. Bonds and the dollar remain very well bid, despite the imminent end to Fed purchases and the best efforts of politicians to dismiss the euro’s and pound’s woes as the unnecessary manipulation of nefarious speculators. After a period of sideways movement the currency DSI sentiment has backed off somewhat from its recent extremes. Sterling in particular seems to have taken over whipping boy duties from the euro for the moment, and may have just finished a failed breakout from a channel on the 1-month chart. I have entered a short position with a stop above the upper channel line:

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Source: Interactive Brokers

If it tops here, crude oil will have put in a right shoulder on a ponderous 6-month H&S formation. A close today below 81.79 in the April contract would also create a bearish outside reversal bar (not shown):

Interactive Brokers

Source: Interactive Brokers

Over the weekend Marketwatch ran a segment prominently touting “The Year of the Bull,” complete with an upward sloping line starting from March 1, 2009.

If immediate new highs are in store for the major indices I would expect them to be muted at best, following Friday’s buying frenzy and the outpouring of bullish sentiment and resignation from the bears. If all the indices turn and fail right here I would think we will put in a stronger, swifter leg to the downside than we saw in January. And with entries in various markets offering tight, well-defined stops at multi-week highs, risk/reward favors the battered bears for now.

Sarkozy: Greek bailout will be good for the Euro

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Of course this man doesn’t care a whit for the truth, so he is either an economic ignoramous (quite probable for a French lawyer and politician) or just plain lying when he makes statements like the following:

“If we created the euro, we cannot let a country fall that is in the eurozone,” said Sarkozy yesterday before a meeting with Papandreou in Paris today. “Otherwise there was no point in creating the euro. We must support Greece because they are making an effort.”

EU leaders have so far refused to give financial aid to Greece and have ordered the government to cut its budget deficit, the EU’s highest, on its own. While Papandreou says steps taken this past week to slash the shortfall warrant more help from the EU, German Foreign Minister Guido Westerwelle said yesterday that his country is “not going to write a blank check.”

Of course, a Greek default would strengthen the euro, since billions in balances would go poof, thus increasing the worth of the remainder. A bailout here will lead to bailouts in every Mediteranean country, quite possibly including his own. Pray tell, how will creating hundreds of billions more euros firm up their value? On the other hand, if every nation in the eurozone but Germany defaulted and then quit the euro for their old pesos, lire, francs and drachmae, it would be very strong and the Germans would just rename it Deutschemark.

Papandreou is visiting Berlin, Paris and Washington after his government passed a 4.8 billion euro ($6.5 billion) austerity package on March 5. A poll published in To Vima newspaper today showed 51.9 percent of voters support him even after the cuts, compared with 47.5 percent who don’t.

Sarkozy, who didn’t say financial support would be forthcoming, will meet Papandreou in the Elysee Palace around 6 p.m. local time. They will brief reporters afterwards.

Watch out, Americans. You don’t suppose that this American-born, Harvard-groomed oligarch is trying to take your money to prop up his racket, do you?

Final Resort?

Papandreou is indicating that Greece may still need financial support and is prepared to turn to the IMF if necessary, calling it a “final resort” on March 3.

That prompted a rebuff from European Central Bank President Jean-Claude Trichet a day later because finance officials fret such a move would signal the EU isn’t capable of solving its own problems. Italian Finance Minister Giulio Tremonti is nevertheless refusing to rule out a role for the IMF in any aid package.

“The IMF should act as a bank” in any rescue, he told reporters in Venice yesterday. “We finance the IMF so it can use the funds around the world. Why not use that capital with the IMF acting as a bank with its know-how?”

Tremonti also said that the EU could issue “eurobonds” or coordinate the sale of euro-denominated government bonds to better counter “financial speculation.”

Sounds like a bit of a turf war there between the IMF and the ECB, each vying with the other to administer the bailout and control the situation for their respective backers.  The IMF gets much of its funding from the US, so let’s root for the Frenchman here.

As Greece calls for more help, Merkel on March 5 turned her focus to restricting the use of derivatives to halt “speculators” from exploiting countries’ budget deficits. Greece has done its work and Europe and the U.S. must now ensure that financial-market speculators aren’t allowed to inflict further damage on Greece or on other countries, she said.

Merkel shows she’s not above the dishonest game of shifting blame to the markets for having the gall to recognise that Greece’s credit risk might a tad bit elevated.

Sympathy for the euro

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Sentiment is still really lousy and downside momentum is waning. This is the same condition that persisted in the dollar from August through November before violently clearing. No telling how long this holds up, but I would not want to get caught short without a stop here — one day you could wake up and find out that it’s spiked 3 cents overnight.

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Of course, I am bearish on the commodity currencies CAD, AUD, NZD and ZAR (and actually also JPY as of this evening’s spike), and if these fall the euro is likely to make new lows. Conversely, a euro spike would likely coincide with a general dollar sell-off.

Some kind of news about Greece or other GIPSIs could be a nice catalyst for a rally — it doesn’t quite matter what the news is, just that there is something to get people trading. The crowd’s reaction often makes very little sense and can’t be predicted by news alone.

Gold

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Look at the similarity between the March 2008 peak and immediate aftermath and what we’ve seen since the December high in gold:

Prophet.net

Sure, there could be a little more oomph here for a push like that close second peak in ’08, but just because gold hasn’t dropped like a stone doesn’t mean the mania will go on without a hiccup. Each high was accompanied by extremely high and sustained bullishness, which tends to exhaust the upside for at least a few months, since after such an event everyone has already bought all the gold they want for the time being.

Also, if the euro’s run is over, why not gold’s? For all its timelessness, the markets still treat it like another currency, a highly-speculative one at that. Here is a euro chart where I’ve highlighted the same periods as above:

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I am going to view any near-term upside with an eye towards taking a short position in each of these, though of course I own physical gold for safety’s sake.

Discount window warfare

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I glanced at the markets at 4:30 just in time to see every “risk” market spike down hard together. That kind of instant, coordinated movement only happens on announcements, usually something out of Washington. Turns out the Fed spooked traders with news of a 0.25% hike in the discount rate, the rate at which distressed banks borrow from the central bank.

For release at 4:30 p.m. EDT

The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.

Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve’s lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19.

In addition, the Board announced that, effective on March 18, the typical maximum maturity for primary credit loans will be shortened to overnight. Primary credit is provided by Reserve Banks on a fully secured basis to depository institutions that are in generally sound condition as a backup source of funds. Finally, the Board announced that it had raised the minimum bid rate for the Term Auction Facility (TAF) by 1/4 percentage point to 1/2 percent. The final TAF auction will be on March 8, 2010.

Easing the terms of primary credit was one of the Federal Reserve’s first responses to the financial crisis. On August 17, 2007, the Federal Reserve reduced the spread of the primary credit rate over the FOMC’s target for the federal funds rate to 1/2 percentage point, from 1 percentage point, and lengthened the typical maximum maturity from overnight to 30 days. On December 12, 2007, the Federal Reserve created the TAF to further improve the access of depository institutions to term funding. On March 16, 2008, the Federal Reserve lowered the spread of the primary credit rate over the target federal funds rate to 1/4 percentage point and extended the maximum maturity of primary credit loans to 90 days.

Subsequently, in response to improving conditions in wholesale funding markets, on June 25, 2009, the Federal Reserve initiated a gradual reduction in TAF auction sizes. As announced on November 17, 2009, and implemented on January 14, 2010, the Federal Reserve began the process of normalizing the terms on primary credit by reducing the typical maximum maturity to 28 days.

The increase in the discount rate announced Thursday widens the spread between the primary credit rate and the top of the FOMC’s 0 to 1/4 percent target range for the federal funds rate to 1/2 percentage point. The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve’s primary credit facility only as a backup source of funds. The Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the 1/2 percentage point spread.

Ok, so they are finally going to tighten up a bit, just in time for the next wave of home mortgage and commercial real estate defaults. This is a deflationary action, and it fits right into the psychology of a top, where Fed officials would be expected to conclude that the storm had passed.

When thinking about Fed decisions, I assume that it is not actually foolish economists like Bernanke and crew who make them, but their cunning and wealthy bosses — Blankfein, Dimon and company. Why would bank execs want tighter credit at the Fed? JP Morgan and Goldman Sachs likely don’t give a hoot about 0.25%, but this could push smaller banks over the edge and into the FDIC’s Friday lottery, whereby their deposits are gifted to other lucky banks.

As for the significance of this for the markets, it sends a signal that I believe will often be repeated in the coming months and years: bankers do not want to destroy the dollar any faster than they can help it. Hyperinflation is game over for the banking cartel, since the value of debt (and therefore bank assets) goes to zero.

The Fed is likely to look tougher from here on out (and actually they have not created new base money for about 12 months), especially in comparison to their European, Australian and Canadian counterparts. The Aussies and Canadians still have to liquidate their housing bubbles, and it is a very safe bet that the high rates that have made for such a lucrative carry trade are going to fall hard, along with their currencies.

Don’t be surprised if the dollar climbs all the way back to its 2000 peak.