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FX Daily EUR/USD, GBP/USD, Commentary May 8, 2012

Both the EUR/USD and GBP/USD definitely had more desire for the the run up than I expected yesterday. I did think the GBP had more potential to the upside but it seems there was a much bigger desire to fill the gap on the EUR/USD than I anticipated. Which in turn drug the GBP/USD with it. The gap hasnt quite filled as I type this but an 0ver 100 pip move was a good attempt. I did short some clear manipulation moves on both pairs yesterday and took the 20 pip hit on both so any of you who did the same dont feel bad. Hindsite being 20/20 the reversal and odds for the gap closing were the better trade. We cant win them all.


The way I am looking at the EUR/USD now is the reversal has started but being the 1st push from the lows (3 intraday pushes as well) does still have potential to form the 3rd long term push chop in price here so I will be looking to short from the highs (of which I would be most happy with considering fundies) or go long at the lows from a stop run there. I do still feel there could be some optimism creep into the market considering the possibility of a vain attempt by Greek officials to work together plus I do believe the new French president Hollande will be saying how happy he is with working together with Merkel on the fiscal pact. From what I read the news was a bit overblown with what he wanted to change in the fiscal pact so that has potential to simmer down from my perspective. Having said that it really doesnt change the fundamental picture in Europe and my longer term bias is down.


The GBP/USD is in the same scenario but price is at the opposite end of the scale. We have seen 3 intraday pushes to the upside yesterday and it has now formed the high and low of what could be the 3rd push chop. This pair has potential for either direction at this point so in order to take the short I need some clear manipulation at the highs from yesterday and for a long I would want to see the manipulation at the hourly 200EMA at least.

Forex News Today

Scheduled news releases are light again today with German Industrial Production and some speak from the ECBs Draghi later in the day. The French banks are on holiday but that shouldnt effect liquidity that much. The US does have one low impact event with IBD/TIPP Economic Optimism but I dont expect that to move the market.

What will be watched are the bond auctions I mentioned in the May 7th commentary. The Greeks will be trying to sell their bonds on the market and with the election only making more questions whether they will receive the next chunk of cash from the bailout or not I have my doubts this will go well. Also the EFSF will be trying to sell bonds today. The last time they tried it didnt go so well either so we will be watching for any tape bombs referring to these two auctions as well.

Whats Next? 

As I filter through my news sources Idid find a very good article that describes my opinions on what will happen in the short term in the Euro Zone and it just makes sense to me. Just how much time this sidestepping will gain remains to be seen but I do fully expect a dance to ensue something to the degree described here. Of course with some fancy moves added in for creativity hahaha. This from Peter Tchir from TF Market Advisors.

The markets will digest the elections as we illustrate in the weekly report.  We are already seeing it play out.  After an initial swoon in markets, they have rebounded, and already threaten to take out some post election shorts.  Germany has said they will play nice with France.  Merkel seems to have the trickiest job as she and her supporters lost support for their bailouts, and yet in Greece, the people who took the bailouts also lost power.  It is funny that both the giver and receiver are viewed as having done the wrong thing.  This will be important over time, but not this week.

This week we will see everyone play nice. Conciliatory words will be spoken.  Growth will become the topic de jour.  The markets will fall all over themselves once again on news of bank bailouts.  The headlines we get in the early part of this week will once again be overwhelmingly designed to encourage people and the markets.  Europe will have a new spirit of co-operation and will welcome fresh insights into the process.  Growth, growth pacts, plans to grow, infrastructure growth, etc., will be talked about.  There will be talk, and maybe even action on the bank recapitalization efforts.  Good banks and bad banks will abound.  Governments will promise money to banks at rates so low no sane investor would even consider.  So I look for a continued bounce and am a bit net long in the TFMkts Best Ideas™.

Ultimately these plans will fail, and we will see fresh lows on the year for stocks, with the U.S. and Germany hit hardest (having outperformed by far too much already), because:

  • Germany in particular, but France and the Netherlands will have trouble justifying their contributions to the bail-out.  They will be forced to turn to domestic issues to satisfy their electorate and this will become obvious to the market.
  • Growth isn’t easy to achieve.  Once “growth” moves from a vague concept stage into something resembled a plan, investors will likely laugh at the attempts.  It will be clear that most of the plans are unlikely of achieving long term growth above and beyond the cost of achieving it.  That will not help the bond markets, and in turn will spill over into equities as they realize they were fooled by headlines and hype over reality, once again.
  • The good bank/bad bank concept is a loser to start with.  The bank recapitalizations just enshrine zombie banks.  By the time a bank is getting government gifts, the problems they have hidden are likely as large as the obvious ones.  The managers don’t worry about lending, they worry about protecting their jobs and their income and hoping nothing else comes out.  They hoard the new money in an effort to grow capital and in the hopes that the problems no one noticed go away before someone notices.  Starting fresh banks would be ideal.  Or letting some bad banks fail and then starting them fresh would be okay.  Letting the existing banks get taxpayer money at uneconomic rates, does nothing for the citizens, or the country, and ultimately if there is any “winner” it will be the banks, but even that may take years to play out.
Happy trading
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