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Forex EUR/USD, GBP/USD, EUR/JPY Commentary March 23, 2012

Just as outlined in the Forex Commentary from yesterday the EUR/USD and GBP/USD made the nice move to the downside after the manipulation making the stop run to the upside. I actually expected a bit deeper of the pullback but who cares as long as we see what the Smart Money is doing and jump in at the right time. I personally took the short on the GBP/USD. Of which you can see posted in our recent trades tab here shortly. However I was out done by one of our members who made a gain of over 250 pips trading the EUR/USD and EUR/JPY. It makes ya feel warm inside when the student manages to surpass the teacher. Good job Daniel. Below is a screen shot of my trade just before it hit my take profit.

*Correction that was 150 pips Daniel booked

Looking at the picture today we have had the break down on the EUR/USD but it has gone back into its level 3 price action. I do expect another drop today but again it may have a deeper stop run to the upside as I expected yesterday that never came. We will have to just wait for the stop run to see.

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The GBP/USD looks even better since it has broken down and closed outside its level 3 PA and we will be expecting level 2 long term today once the Smart Money finishes their accumulation phase.

The news is very light today with only UK Mortgage Approvals during the London session and US New Home Sales for New York. Unless of course we have any tape bombs dropped today the markets should be moving solely by the manipulation of the Smart Money. Should be a fairly easy days trading today. We will see.

How about an end of the week rant?

As I look around my favorite news sources I see an article by my favorite gloom and doomer Graham Summers at Phoenix Capital discussing why Europe will fail at saving the Euro. As you all should know I have a little more faith than he does but I have to admit he comes up with a hard line that is difficult to deny. Do I think we are in for a long hard haul? Yes I do but the fact is I thought it would have already happened and was surprised to see how the banker cronies are throwing everything including the kitchen sink at the mess and I have my doubts they will stop until they have run out of sinks. The data is mildly improving and if it does speed up we do have a chance.

Here are a few points Graham makes that strikes me as hard to deny.

 Fact #1: EU Banks as a whole are leveraged at 26 to1.

 This is, of course, based on the assets the banks are reporting. According to independent sources, the leverage levels are in fact far, far greater than this (though 26 to 1 is already bordering on Lehman Brothers’ leverage levels).

 Indeed, as far back as September 2011, PIMCO’s Co-CIO, Mohamed El-Erian (one of the most connected of the financial elite) noted that French Banks were running REAL leverage levels of almost 100-to-1.

 El-Erian said French banks are a particular cause for concern, noting that “credit markets now put their risk of default at levels indicative of a BB rating, which is fundamentally inconsistent with sound banking operations.” He adds that bank equity now trades at a 50% discount to tangible book value on average,while the ratio of market capital to total assets has fallen to 1%-1.5%, compared with 6%-8% for “healthier banks.”

The reason this seems totally credible to me is the fact that most all of the European banks are underfunded and the shadow banking sector is not even covered in the 26-1 leverge they admit to so  Mohamed El-Erian is most likely correct with his assessment they are leveraged at 100-1. What gives more credence to this is the fact that Deutsche Bank just sidestepped the US new rule for bank capitalization for US subsidiaries of European banks by changing its business structure.

This from Zero Hedge

Deutsche Bank AG changed the legal structure of its huge U.S. subsidiary to shield it from new regulations that would have required the German bank to pump new capital into the U.S. arm. The bank on Feb. 1 reorganized its U.S. subsidiary, known as Taunus Corp., so that it is no longer classified as a ‘bank-holding company’. The technical change has important consequences. Taunus—which at the end of last year had about $354 billion of assets and 8,652 employees, making it one of the largest U.S. banking companies—won’t have to comply with a provision of the U.S. Dodd-Frank regulatory-overhaul law that essentially forces the local arms of non-U.S. banks to meet the same capital requirements that American banks fact. A provision of the Dodd-Frank Act was going to require Deutsche Bank to infuse Taunus, which for years operated with thin capital cushions, with what executives feared could be as much as $20 billion. Taunus is no longer a bank-holding company and won’t have to comply with the tougher capital rules, even though Taunus still houses Deutsche Bank’s U.S. investment bank.

So far there has been only one country in Europe that has recapatalized its banks and that was Ireland. Once they did it was only weeks until they needed the bail out from the EU. Even the largest economy (Germany) in the EU has not recapitalized its banks because they cant. The Feds USD swap lines started earlier this year were most likely due to the fact there was a European bank that would have been closed for business the next day if the Fed did not step in. Plus now we have the LTRO which gave some breathing room to these insolvent banks but the air is already running out. Now lets get back to Graham.

 Fact #2: One Quarter of the ECB’s balance sheet is PIIGS debt 

As part of its moves to “save the system” the ECB has gorged on PIIGS debt. Today, one quarter of the ECB’s balance sheet is PIIGS debt. Care to take a guess at what these assets are valued at? I guarantee it’s nothing near their real market values. 

The ECB managed to swap out its Greece debt into new debt that would not take a hit should Greece default. But it won’t be able to do this with the remainder of its PIIGS’ debts. Indeed, it’s not even going to try. Instead, the ECB plans on shifting any of the losses from these debts onto the individual EU national banks:

ECB Balance Sheet Jumps Above €3 Trillion

The mix of bond purchases and loans has exposed the ECB and the 17 national central banks that make up the euro to losses in the event of defaults or bank failures. Last month, the ECB was forced to swap its €50 billion Greek bond portfolio for new bonds to shield the banks from potential losses in the event of any forced write-­?downs.

If banks that have borrowed from the ECB can’t pay the money back and the collateral they have posted falls in value or becomes worthless, the ECB would be on the hook for losses. Most of these losses would be spread across national central banks according to their size, meaning Germany’s Bundesbank would face the largest exposure.

What this tells me is that not only are the European banks in trouble but so are there respective central banks and therefore the ECB. Of which was reported before the LTRO last year to leveraged at 25-1 then. I dont even want to think of what that leverage is today. At the time the reports said the ECB only had to take a hit of a 7% loss to the assets to wipe out all the available cash on its balance sheet. ( I could be off on the # but not far) Now the question to ask yourself right now is why would the ECB do something that has such potential to damage the bond markets such as subordinate bonds and change the rules as they please? Well for me the answer is simple. They couldnt or they would have went bankrupt that same day. We have all heard the saying. If it quacks like a duck, walks like a duck and looks like a duck. Its a dam duck! Right? LOL

Last is what Graham says about the Fed running to the rescue. They cant without causing civil unrest around the world. Interesting take on what a QE3 program could do.

Fact #3: Even after all of its inteventions and purchases, the ECB is far too small to contain this mess (ditto for the Fed)

I know many of you are thinking “the ECB or Fed could just print money.” That answer is wrong. If the ECB chooses to do this, Germany will walk. End of story. They’ve already seen how rampant monetization works out (Weimar).

And if the Fed chooses to monetize everything to hold things up, then the US Dollar collapses, inflation erupts creating civil unrest, interest rates rise killing the banks, US corporations and the US economy… all during an election year.

Good luck with that.

Remember, the Fed’s QE 2 program which was a mere $600 billion (to bail out Europe the Fed would need at the minimum $2 trillion) pushed food prices to all time highs and kicked off riots and revolutions around the globe. Imagine what $2+ trillion would do.

So there we have it. Some food for thought over the weekend. Like I said I am a bit more optimistic and if the US can somehow pull its head out of its butt and get back to some decent growth then we may just pull through. Although I admit that none of the presidential prospects other than Ron Paul seem to be seeing any light these days. Time will tell. Interesting times we live in.

Happy trading all


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1 Comment

  1. DannyH
    DannyH March 23, 07:41

    Hey Chad, insightfully and cheery commentary as always ! Thanks for the mention above, as I have said many times any success that I am achieving is due to the great work you and Sterling have done in the room and with me personally over the last 10 months or so for which I am very grateful, it wasn’t quite 250 pips yesterday only 140 in the end, but I am up to the best part of 500 pips for the week, so still very happy !

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