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Forex Market Daily EUR/USD, GBP/USD Commentary May 28, 2012

Happy Memorial day every body. Due to the holiday the markets could be choppy so be careful out there.

The EUR/USD has had its fourth week in a row opening with a gap on Monday. However this time it was up rather than down. There were a couple news events over the weekend that may have caused this jump in optimism. One was the opinion polls in Greece show the pro bailout party gaining a majority. I find it rather comical the market would react this way since the polls taken are changing all the time and most of them are taken of a very small portion of the population and leaves a big question of the reliability of the numbers to say the least. It reminds me of the old toothpaste commercial of “4 out of 5 dentists recommend _____” However it seems the market wants to believe and it would be nice if it is actually true and Greece really does want to stay in the Euro. Eventually they will have to face the music and what that means isnt entirely clear at the moment. Time will tell.

The way I see it is its just another chance for a short squeeze and the Smart Money will take these opportunities when ever the arise. There also was news of the EU forming a fund to rescue banks which in my mind would make more sense on creating optimism but I think this is just another band aid fix and will eventually fail mainly because where are they getting the money for this fund? Countries who have no money to give is who. More on that a little later so lets forget the news for now and go to the charts.

As I type this the EUR/USD is testing the highs from Friday and the Thursday rejection showing decent momentum. There is a chance that this will break and do a stop run to the upside. I will be keeping an open mind on it and if i do see a clear confluence trade then I will take the long but it will need to be very pretty and clear. Otherwise I will be happier seeing the stop run up and shorting from around the 1.2626 level with a clear trap move there which is the daily lows we broke last week and the market will usually test those daily areas before moving down.  

The GBP/USD is looking like it wants to squeeze some shorts also and has the better probability for the longer move to the upside with daily resistance around 60 pips away from current price. It is already through Fridays highs working on the 1.5700 level. I am in the same frame of mind with this pair as the Euro. The Smart Money will most likely want to push some shorts out of the market before the next move down so there is a good chance to make money in either direction today. However dont forget its a bank holiday.

Forex News Today

Simply put there is none . I dont expect much for tape bombs either as the heads of state affairs are observing Memorial Day and are more likely to take a break from the rhetoric while doing so.

More European Woes

There are only a hand full of people out there that I admire for saying things like they are and willing to face the music of the mistakes made over the last few decades. Tell the truth about it and what we are most likely in for. Here is a few excerpts from a Peter Tchir article that is well worth the full read here where he explains how the European powers that be have dropped the ball on most every occasion.

It is clear that Greece has had a solvency issue now for over 2 years.  The ECB and Troika chose to treat it as a liquidity problem.  Maybe, they could have argued that in early 2010, but by the summer of 2011 it was obvious to any credit observer that the problem was solvency, yet they continued to treat it as one of liquidity.  That is scary because if they fail to see the problem correctly now, they will fail miserably.  Not only is the problem clearly solvency, but now forced currency conversion has been added to the mix. Any “solution” from the EU must now address that risk, and it is not the same as solvency.  Programs that can protect against solvency may do nothing for the redenomination risk.

Not only did Europe fail to address the problems, but in spite of convincing themselves that all these programs prevented contagion risk, they actually ensured contagion risk.  That contagion risk, that they forced on themselves is now coming back to haunt them, and must be carefully addressed in any policy “solutions”.

Greece is running a primary deficit, but that doesn’t make its interest payments any less important.  Greece has €150 billion in loans, roughly half of which seem to be at 4% and half seem to be tied to PSI, so I conservatively assumed 2% on those.  About €4.5 billion of interest is being paid to the Troika annually on these loans.  The ECB (and EIB and other central banks) hold approximately €50 billion of bonds at about 5% average coupon for another €2.5 billion of interest.  True “private sector” holders of Greek debt only receive about €1.5 billion.  Most goes to pay the €66 billion of 2% coupon PSI debt and the rest is for the €4 billion of holdout English law bonds.  I did ignore the €14 billion of t-bills in this analysis.

It is very obvious though, that for Greece to get any help on its current interest expense it has to cut back on the Troika and ECB in particular.  Over 80% of its annual interest expense now goes to pay government and quasi governmental entities.

It’s not just the interest payments that are heavily skewed towards the Troika, it is also the debt redemptions that Greece is facing.  A staggering 98% of all debt redemption in the next 6 years goes to pay off the Troika and ECB, with the ECB’s remaining bond portfolio representing 35% of the total, and almost all of the payments in the next 3 years.

Never has there been a situation where a country is in such deep trouble that it needs to default and virtually all of the debt is already held by entities which normally step in AFTER a default and currency devaluation.

They See the Light or Dark Bottomless Pit

I keep playing with scenarios and find it hard to find out where a Greek exit doesn’t result in a steep sharp decline in the market.  We could go through more ideas of ECB intervention, but in the end most will have flaws.  Dealing with currency conversion risk is huge.  Dealing with the contagion risk that has been created by the EFSF is huge.

I believe that as they start to plan, they will eventually listen to some of the “doomers” and decide that they should attempt some policies to retain Greece for now.  To fix the situations in Spain and Italy so that a return to the drachma isn’t likely to spark fears that Spain and Italy will also redenominate.

Can Greece leave and the damage be contained?  Sure, it’s possible, but seems highly unlikely.  Can Europe do enough to keep Greece in for another 3 to 6 months and make plans that make an exit controllable or possible avoid an exit altogether?  That is possible, and seems a better solution.  Will Europe force Greece out thinking they have a plan that fails miserably and sparks the miserable series of consequences I’ve outlined?  Sadly, yes.

Happy Trading guys and be careful out there today


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