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Forex Daily EUR/USD, GBP/USD, GBP/JPY Commentary April 26, 2012

Even though the market seemed to be waiting for the Fed yesterday the big surprise was from the UK GDP figures signaling that the UK is back in recession and we had a quick 70 pip drop in the GBP/USD and around 100 on the GBP/JPY. I am always weary of news related moves and just stuck to my plan I laid out in the April 25 commentary. I wasn’t real happy with the candle formations until after the 2 pins to the low and spinning top candle. I could have got a better price if I took the entry during the spinning top but I wanted a bit more confluence and that ST was enough. I still considered it aggressive. I would really like to hold this through Friday after the BOJ announcement to try and maximize the gains here but once I see a clear cycle I will be moving the stop to protect 50 pips and see where she goes.

The chart of the EUR/USD is still a mess but with the Fed doing pretty much as expected with just a small hint of holding rates low through 2014 and no mention of QE3. the Euro seems poised for a next move to the upside. Its really only a small bias up but considering its held its 4hr 200EMA well first finding resistance then support after the break on Tuesday I am thinking it will only take a bit more optimism to push it up through the recent highs. As I said yesterday I am paying more attention to the GBP/JPY and today the GBP/USD looks interesting also.

The GBP/USD is more interesting today because of the break above the daily high I mentioned yesterday. It has made a test of it twice and now broke above and finding support from the upside. I wont be totally convinced until after London opens today but would be happy to take the long here with some nice manipulation down before the push up. Plus it does not conflict with my GBP/JPY long I am still in from yesterday. What does concern me is the 3 intraday pushes from the lows on the 25th but at this point the reversal may have already been seen as they are intraday levels and we are in a long term technical up trend. Breaking through the daily resistance will open the door for and extension up. Just going to have to wait and see during London.

Here is the current situation for my GBP/JPY trade. I have gone ahead and moved my stop to protect 60 pips. It has already moved 115 from my entry and pulled back so to me that should be enough wiggle room to give it a chance to make the push. As long as my analysis for the GBP/USD and JPY are correct we should see a sustained move. No guarantees though guys.

Forex News Today

UK News

The scheduled releases today are average and the UK Consumer confidence figures were much better than expected and is at a nine month high. Later during the London session the BBA Mortgage Approvals and the CBI Realized Sales numbers will come out with Mortgage Approvals expected to increase while the Sales are expected to drop again. If that makes any sense. That would mean people are buying more homes but retailers and wholesalers are selling less goods. I guess its possible but with consumer confidence up I would say the odds on the Sales figures having the deviation to the positive side is more probable. No guarantees as stranger things have happened.

Euro Zone News

Later we have the German Prelim CPI and ECB President Draghi speaking again. The CPI is expected to drop a couple ticks and if it does come out as expected will mean that the ECB has less chance of doing another LTRO any time soon mainly since yesterday Draghi all but said there wont be one and other ECB members have been saying there is no need for it in the near future a well. Its the same situation as the US on QE3 at this point. They wont be doing anything drastic until something drastic happens to stocks or another bank is about to go under. Of which could be anytime or weeks to months down the road.

US News

The US has  Unemployment Claims and Pending Home Sales. Both I expect to be somewhere close to expectations. What would be a surprise and move the markets is if the Unemployment Claims bumps above 400K of which I have doubts on any probability for.

More on European Banks

As I mentioned above the chance for a new LTRO scheme is low at this point but here is my favorite gloom and doomer again with a few points on where the European Banks stand at the present time which is what leads me to believe it could be any time but also could be pushed out for weeks or months.

Consider the following:

  1. According to the IMF, European banks as a whole are leveraged at 26 to 1 (this data point is based on reported loans… the real leverage levels are likely much, much higher.) These are a Lehman Brothers leverage levels.
  2. The European Banking system is over $46 trillion in size (nearly 3X total EU GDP).
  3. The European Central Bank’s (ECB) balance sheet is now nearly $4 trillion in size (larger than Germany’s economy and roughly 1/3 the size of the ENTIRE EU’s GDP). Aside from the inflationary and systemic risks this poses (the ECB is now leveraged at over 36 to 1).
  4. Over a quarter of the ECB’s balance sheet is PIIGS debt which the ECB will dump any and all losses from onto national Central Banks (read: Germany)

So we’re talking about a banking system that is nearly four times that of the US ($46 trillion vs. $12 trillion) with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for the US), and a Central Bank that has stuffed its balance sheet with loads of garbage debts, giving it a leverage level of 36 to 1.

And all of this is occurring in a region of 17 different countries none of which have a great history of getting along… at a time when old political tensions are rapidly heating up.

As bad as the above points may be, they don’t even come close to describing the REAL situation in Europe. Case in point, regarding leverage levels, PIMCO’s Co-CIO Mohammad El-Erian (one of the most connected insiders in the financial elite) recently noted that French banks (not Greece or Spain) currently have 1-1.5% capital relative to their assets, putting them at leverage levels of nearly 100-to-1.

And that’s France we’re talking about: one of the alleged key backstops for the EU as a whole.

Happy Trading



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