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Forex EUR/USD Commentary February 17, 2012

So now all is good in the world and the rally is back. Well not so fast. Of course we had the direction of the market right yesterday as we tracked the Smart Money but they had a bit more whipping of stops to do than I thought and they of course got me.

As I check my news this morning looking for the reason for the huge spike of 180 pips from the lows on the EUR/USD. I see that the ECB has decided to swap their Greek bonds for new ones which will keep them from being exposed to the potential CACs that Greece has threatened to create to get the hold outs of the PSI deal to participate in the losses. It seems to me the ECB really had no choice since the fact they were refusing to take any losses on the bonds they hold would give them preferential treatment and create a precedence for any future bail outs and European bond markets would most likely crash as investors shun European sovereign bonds all together. So the day has been saved once again. I dont think so LOL

I tend to agree with the folks at Zero Hedge on this one and see it as the door for the Greek default getting opened a bit wider. Peter Tchir of Commerzbank explains it well and why this is just one step closer to the big default.

Firstly this debt exchange story is still that, just a story, and just doesn’t read right. It feels like either the reporter didn’t understand the source, or the source had some key detail wrong, but let’s pretend it’s true.

Well, early this week I tried to put some ideas down on what Greece should be doing. The key is ensuring that they have financing in place after a default. An operating central bank would be helpful and the ECB was on the list of groups that Greece needs to deal with. The exchange seems very favorable to the ECB. No notional reduction – which frankly seems greedy – why not just take a notional amount equal to the cost basis. Most importantly, it looks like the ECB is trying to segregate its holdings from the “private sector” bonds. This step would make it easy for Greece to default on old bonds and remain current on new bonds. Maybe that encourages greater participation, maybe it won’t. Why would Greece cut a special deal with the ECB that is so favorable to the ECB? Did they negotiate continued ECB support for its bonds as part of the exchange deal? I really don’t understand the exuberance over the story (which really does seem to be off).

On the other hand, maybe the problem is solved. Italy issued a 100 billion 30 year bonds with a 1% coupon. Banks buy these at 50 on the auction (since the ECB can’t participate in auctions). The banks then sell the bonds to the ECB for 55 .  The banks build equity capital quickly since 5 points on a 100 billion adds up quickly. The ECB then exchanges these bonds for new bonds with a 1.1% coupon. It distributes the 45 points of “profit” to the Italian central bank. Italy would owe 1.1% on 100 billion of debt due in 30 years. Italy would have received 115 billion from the sale of the original bonds and their share of the ECB profits based on the exchange. The banks will have made 5 billion on a single trade. Repeat this as often as necessary. Does this sound stupid? If so, how is it so much different than the bond swap story the market is so excited about?

To be honest this seems like just another use of the news by the Smart Money to push the market where they intended already. The next short squeeze is on the way it looks and we may actually be on to new highs for the EUR/USD. Just be ready when the hammer drops and the default kicks in. It wont be in March but will most likely be this year. My crystal ball is a bit fuzzy on that one LOL.

Technically on the daily chart the support at 1.3026 was firmly rejected and closed rather bullish and right in the 5 pip gap between Tuesdays close and Wednesday open. Man those guys are tricky LOL. At this point I would expect a pull back to test the 1.3080 level of support before the next push to the upside and possibly test the recent highs next week.

The news is light today with only German PPI numbers and Current Account figures from the EU. otherwise the US has CPI figures and is expected to rise a smidge so I will be watching for the typical rumor tape bombs and keep my mind open. However I am a bit more favorable of a long today


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