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Forex Commentary EUR/USD, GBP/USD, GBP/JPY April 27, 2012

First off I need to make a correction on my April 26th forex commentary. When I mentioned that the BOJ had more or less promised more easing this meeting I was wrong. It wasnt the BOJ it was Bloomberg. When I saw it come across my Talking Forex there was no credit given to who had said it and I assumed it was the BOJ because of the recent talk that had been coming from them. My bad. I do still expect them to ease but its far different than then coming out and admitting they are. Having said that there were also “market talks” saying that the BOJ wasnt going to ease at all. I fully believe this to be a manipulation move to drive the Yen crosses down and squeeze weak longs (got me). However I was happy to see that Sterling got in the long GBP/JPY toward the London market close.

While I am on the subject of news from yesterday I should mention the Spanish downgrade from S&P. This sheds a whole new light on the potential for Spanish banks being downgraded by Moodys in the coming month or so. With this added in, the picture for the Euro seems even more bleak. The fact that the ECB is on a ledge so to speak with Germany regarding more LTRO, its going to take a bank on the verge of failure before they do another one. I wont be looking for longs on the Euro any time in the near future.

The Charts

With that news and considerable drop at the end of the US market the EUR/USD is starting to become more clear but I want to see a solid push below the 4hr 200EMA  (black) here for a clear 1st push to the downside. I will be happy to take a manipulation short with decent confluence but I will be strict on getting a good entry here without having clear direction as of yet.

The GBP/USD is in a bit trickier of a situation with the weakness of the Euro. Its still possible if not probable that the GBP go up from here while the Euro goes down and the EUR/GBP drops like a stone but that will have to be how it plays out. Otherwise if true USD strength comes into play the GBP/USD will be dragged down with the Euro. Of which will eventually be the case but may not happen for a few days. I will not be looking to trade this pair today just for that reason as their are factors that tell me this could go either way and the levels are skewed.

The GBP/JPY is in a medium term chop where I can see 3 pushes down yesterday then it has reversed for the push up with only 2 pushes seen so far.

I have my doubts I will get a trade off before the BOJ makes the announcement mainly because I would prefer the long entry at the lows at this point. If they dont ease and do more QE then its will most likely drop substantially but the probability is low that they will do nothing in my opinion. Check out this report from a previous BOJ board member and you will see what I mean. This is from Bloomberg.

Any failure by the Bank of Japan to expand its asset-purchase program at tomorrow’s board meeting would sow confusion over its policy, a former policy maker said.

Inaction “would be a disaster for communication,” Atsushi Mizuno, who served on the Bank of Japan board from 2004 to 2009, said in an interview yesterday in Tokyo. All 14 economists surveyed by Bloomberg News before tomorrow’s gathering predict Governor Masaaki Shirakawa and his colleagues will boost asset purchases amid forecasts for growth to slow through the year.

Forex News Today

News today is busy with the BOJ report due sometime before 1am EST. they always have this as a tentative schedule and usually time the release during lunch hour in Japan and as inconvenient for other traders around the world. Its no wonder with the lack of liquidity at these times we often see large moves that get a good part of retraced before or during London.

For Europe there is  GfK German Consumer Climate, German Import Prices, French Consumer Spending and an Italian 10-year Bond Auction. the ones most watched will be the Consumer Climate and Italian bond auction. If Italian yields start shooting up the Euro will feel the heat and we will have a risk off scenario during the London session.

The US news is light but a biggie with Advance GDP figures. This will be watched close also with the previous quarter being revised upwards but expecting a drop from the previous release. Any surprise to the upside should have the decoupling risk on for US stocks and more pain for the EUR/USD. If its close to as expected or a slight drop I dont expect too much reaction unless this Italian bond auction goes off with out a hitch. What that will mean is investors are willing to fund Italy while the US isnt growing as much as they like. This has more potential to push the Euro up in that case. I think its unlikely but to be honest it wouldnt surprise me as they try to do anything they can to prop up the markets these days.

Now I will leave you with what I would call a fair assessment of Ben Bernanke and his policy I received in an email from Jack Crooks at Black Swan Capital.

Once again it seems the Fed Chairman Bernanke didn’t disappoint the stock bulls.   I expected otherwise.  Wrong again I was.  I continue to be amazed by Ben’s logic here.   

He says he wants to produce some inflation through monetary policy so the US economy doesn’t get caught up in a Japanese-like deflationary spiral.  But in the process of creating inflation, which is in commodity prices primarily, thanks to the implicit weak dollar policy (driven by the Treasury and deftly executed by the Fed), he hurts consumers and businesses with many of these policies even though he tells us he is really saving them.   

So, let me see if I get his right:  

  1. Pay those who save nothing on their deposits
  2. Then further reduce their purchasing power by creating inflation
  3. Continue to punish the interbank lending market (because of zero interest rates); therefore, banks have no incentive to lend to other banks that may actually have real economy lending opportunities.
  4. Pretend the US labor market is healing, when it is now starting to weaken again, and unofficial unemployment and under-employed rate is off the charts, proving that something is very wrong with existing policy.
  5. Then proceed to tell us how much this policy is working, and just in case there is a slowdown, tell us we will get more of this same policy that is working so well.

My head hurts after writing that.   

But we do know who this policy helps—the financial economy; which consists of some very smart people who know where their bread is buttered and just so happen to have a lot of extra money lying around to make campaign contributions. Hmmm…   

So Ben, you are telling us to forget about:  

  1. Faith in the currency and benefits of rising purchasing power (falling prices in a recession are supposed to deliver rising purchasing power for consumers who naturally have fewer dollars in a recession)
  2. Massive over-regulation
  3. Incredible federal government waste and incompetence among its agencies
  4. Punishing tax rates that discourage entrepreneurs and business investment
  5. The self-reinforcing positive impact an active interbank market
  6. On and on and on …

Of course, many of these things are out of the Fed’s control.  But that is the point.  Don’t pretend monetary policy is a substitute for the rest of the ills, otherwise you create even more distortions.    

This is a comment posted to our blog yesterday from one of our readers:  

No disappointment for the markets as that stupidest of Fed Chairman held out the possibility of more publicly announced QE if the economy deteriorated. Yet he is sending out conflicting messages because he concedes that another round of QE would have negligible effect on unemployment. All of his mixed messages are deceitful and disingenuous; as was an earlier statement that he gave to 60 Minutes that he was not printing money. Why can’t he admit that the principal reason for all this monetary maneuvering is to prevent the US from plunging off a fiscal cliff? For if interest rates were not kept artificially low, there would be no way for the US to service its enormous national debt. Better still, his best before date has expired and it is time to give him the boot.  

Have a great weekend



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