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Forex EUR/USD Commentary February 24, 2012

So all is good in the world as of yesterday. The EUR/USD rallied well above 1.3300 and will most likely challenge 1.3400 today. US unemployment claims were outstanding and the US 7yr treasury auction went off without a hitch. Even the German IFO business climate numbers were much better than expected. Plus the S&P and Dow maintaining highs of the year. Even Gold rallied nicely but was squashed back by rumors of a margin hike (I smell some manipulation). Everything is just peachy now. Do ya hear the sarcasm? LOL

Lets just pretend for a minute that all this does mean that all is well and to be honest I hope it is but as I mentioned in yesterdays Forex commentary there are quite a few things missing in the mainstream media that have a large potential to come back and bite us in the booty. The one thing I dont want to do is be a doom and gloomer but reality has to kick in at some point and these issues will have to be addressed.

The biggest question in my mind is when the printing presses around the world break down or some sane fool shuts them down what will happen to this “everything is just fine” rally?

As I was going through my news reports this morning I see that the ECB president Mario Draghi has again voiced his distaste for buying periphrial debt by saying ” the ECB does not provide monetary financing to governments”. I guess technically thats true but the ECB has done some back door QE and provided banks with the LTRO cash injection so the banks can buy up that debt and so far it has worked. However the chance of a credit crunch is only getting worse in the EZ and we will get a good birds eye view next week when the second round of LTRO gets underway. The estimates vary on the size from another 500 billion to 1 trillion Euros. What comes to mind is something I read in an article by Eric Sprott this morning. A very smart guy who runs his own asset management company. Here is the part that got me thinking.

What are the unintended consequences of repeatedly juicing the system? What are the repercussions of all this money printing? We can think of a few.

First and foremost, without continued central bank support, interbank liquidity may cease to function entirely in the coming year. Consider the implications of the ECB’s LTRO program: when you create a loan program to save the EU banks and make its participation voluntary, every one of those 523 banks that participates is essentially admitting that they have a problem. How will they ever lend money to each other again? If you’re a bank that participated in the LTRO program because you were on the verge of bankruptcy, how can you possibly trust other banks that took advantage of the same program? The ECB’s LTRO program has the potential to be very dangerous, because if the EU banks start to rely on the loans too heavily, the ECB may find itself inadvertently attached to the broken EU banking system forever.

That dont sound very good does it? Hopefully Im wrong but I kind of doubt it.

News today is light and the only release note worthy is the US new home sales. Since it was the housing market that created all the havoc in the world any good news from that sector will be positive for risk.

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Looking at the charts with the very bullish close and run past all the resistance I expected to hold yesterday. This run will most likely continue provided we dont get any tape bombs to the contrary. I expect a test of the 1.3436 area where there is a daily high from December 9th and where the market shows plenty of selling. I will be looking for a stop run to potentially test the London highs yesterday at 1.3341 before the long entry.

Happy Trading all



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