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FX EUR/USD, GBP/USD, EUR/JPY Commentary April 11, 2012

The EUR/JPY trade that I was planning Tuesday had a different idea all together. Mainly due to a combination of news events that switched the markets to a risk off situation with the Bernanke speech that everyone expected a hint for more QE and never got it. then the BOJ disappointed with no printing either. On top of that China had a trade surplus that wasnt expected. I did end up trading the GBP/USD and took a 20 pip hit before my USD/CHF short today is posted in the recent trade section of the site. It was a long hard day to say the least but ended well anyway.

Considering the charts presently most all the pairs have retreated to the 3rd push chop and direction is not that clear. I do have a small bias for the move down and thats what I will be looking for today. The reason is the failed push up and price closing closer to the lows than the highs and fundamentals agree with a decent down move for the time being. As I type this the EUR/USD is testing the 200ema on the 15min and showing some resistance I would expect there to be a stop run of sorts above that level but if it hold here the stop run around it and the Asian session high may be all we get before the drop during the London session. If we get the clear trap move I will be happy but would like to see a better stop run than what I see now.

The GBP/USD is in a similar situation back in 3rd push chop and sandwiched between the hourly and 4hr 200emas at the moment. It is showing some what of the trap on the 15min right now but for me I would be happier waiting for the test of the hourly 200 just 15 pips above current price. If we dont get that before London open the chance is we wont so just waiting to see on this pair.

The EUR/JPY is pretty much attached at the hip to the USD/JPY right now which is typical in the risk on/off scenario. In this case off. What does look good is that all the Yen crosses have seen a false push to the upside and then a clear push below and with a risk off market these should see the 2nd push down today however they all need to agree on the trap move at the same time to give me the confidence in direction here. At that point a trade on any of the 3 pairs is good.

In the news

Scheduled releases are light today with only German WPI from the EZ,  US Import prices and Crude oil inventories. These are low impact events so the manipulation should be clearer.

On the radar

As I mentioned in the April 6th Commentary Spains banks are coming up on judgement day on April 23rd and they are coming into the radar of investors again as their bond yields are taking off once again. this is also most likely contributing to the risk off we see going on. Here are a couple excerpts from The Telegraph article today and Zero Hedge a few days ago.

 The country’s (Spain)borrowing costs have jumped 100 basis points since February, when the European Central Bank last flooded banks with liquidity under its three-year lending scheme (LTRO). “The LTRO was supposed to be the game changer but the stimulus has worn off. It looks like it is falling apart at the seams,” said the Suki Mann from Societe Generale.

A disastrous debt auction last week was taken as a sign that Spanish banks have exhausted their LTRO money and can no longer prop up the Spanish state through this back-door funding, leaving the country nakedly exposed. Other buyers are scarce after the EU imposed a 75pc haircut on investors in Greece.

Finance minister Luis de Guindos confirmed that Spain has tipped back into recession, with a 0.3pc contraction in the first quarter. He expects the economy to shrink by 1.7pc this year, though Citgroup said it could be much worse. Unemployment is already 23.6pc.

And ZH

Since we have grown tired of variations on the theme of “The Pain in ….” (having been guilty of encouraging it ourselves), we will spare readers this triteness, and instead summarize the attached must read slidedeck from Carmel Asset Management as the ultimate Spanish doomsday presentation. Naive and/or idealistic Spanish readers are advised to resume sticking their heads in the sand, and to stay as far away as possible from the attached 54 pages, which prove without any doubt why not only was Greece the appetizer (have your UK law:non-UK Law divergence trade on yet?) but why things in Europe are about to get far, far worse, as the Hurricane shifts to its next preferred location, somewhere above and just south of the Pyrenees.

In summary, here are Carmel’s five reasons why Spain’s problems are worse than the market anticipates:

1. Spain’s national debt is 50% greater than the headline numbers

Spain’s debt-to-GDP balloons from 60% to 90% of GDP with regional and other debts

2. Spain’s housing prices will fall by an additional 35%

Spain built one house for every additional person added to the population during the past two decades; the fall will decrease GDP by ~2% each of the next two years

3. Spain has “zombie” banks with massive loans to developers and to homeowners

Banks have not begun to realize losses and are vastly undercapitalized

4. Spain’s economy has not stabilized and will continue to deteriorate

Spain has the highest unemployment in the developed world, one of the highest overall debt loads, and the most uncompetitive labor market in Europe

5. The EU will not have the firepower or political will to bail out Spain

Rescue fund headline numbers are misleading and count capital that is not yet committed

And here are the problems that will manifest themselves over the next 12 months:

  • Spain’s true debt burden will pass the 90% “tipping point” identified by Rogoff and Reinhart
  • Housing prices will fall further and faster than anticipated (consensus is 15%; CAM estimate is 35%)
  • Banks underestimate the residential real estate loan defaults (consensus estimate is 2.8% vs. CAM estimate of 11%)
  • Expected housing price depreciation and loan defaults will deepen Spain’s recession (additional 2% contraction in 2012 and 2013)
  • Spain will need to refinance €186.1 Billion in 2012 alone


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