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Weekly Wrap Forex Commentary EUR/USD, GBP/USD, EUR/JPY, GBP/JPY April 1, 2012

The Charts

The Euro has formed a 3 level drop in what I would consider level 3 price action and after the sharp rise to a topping formation I have a small bias to the downside for Monday. Im expecting the stop run to the upside first and will look for the manipulation to go short. This will also agree with the fact of the ECOFIN meetings producing some Euro pumping and should only be a matter of time before the market sees it for what it is (fluff) and the Euro will drop. Every time these guys get together this has happened and the euphoria is shorter lived each time.

The GBP/USD is in a similar situation with a very long 3 level rise starting back on March 14th. I am not as impressed with the topping formation however it does have 2 hourly rejection (stop runs) that agree with the more clear topping formation on the 15min chart. It also has a fairly ugly 3 level rise over 3 days for over 200 pips which would add to the probability of the short. I will be looking for the attempt at the highs and look to short this pair once the manipulation is finished.

The EUR/JPY and GBP/JPY are still tracking the USD/JPY so any trades taken on those pairs will have to be agreeing with that pair in order to trade them. If the Euro and Cable drop and the USD/JPY rises then they will most likely not move much unless the USD/JPY out paces the drop substantially. I will most likely leave these pairs alone next week.

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In the news this week

We do have a fairly eventful week in the news coming up. There not a whole lot data wise but there is the UK and ECB rate decisions and press conferences. Then also the ADP and Non Farm Payroll on Wednesday and Friday. I will cover these more in depth during the week but wanted to point out that most banks across the world will be closed on Friday so NFP will be a very risky trade with low liquidity. I usually dont trade it but for those that do should be aware of that.

In other news. 

In the March 26th commentary I posted a video of a Greek having a go at Germany and I see that commentary has been the most looked at since then. In it he talks about how Germany is using financing to take over Europe and will now pay the price as its loans wont get repaid.

I didnt really put much faith in the idea even though I agree its plausible but since then I have seen some other respected news letter writers having the same idea. This I got from Jack Crooks over at Black Swan quoting a researcher at  Ash Center of Harvard’s Kennedy School. I have to say this makes alot of sense to me and actually is a well worded tale of almost exactly what the crazy Greek was saying.

“When the global financial crisis began, the world could be saved by depression only by massive fiscal stimulus.  Because of the size and global engagement, three countries bore responsibility for saving the global economy:  the United States, China and Germany.  The United States and China acted decisively and averted depression.  Germany stood aside and profited as a parasite on the US and particularly Chinese stimulus.  

“…As Europe struggles to avoid collapse of the southern European economies and the Franco-German banks, Germany sought to paint its own role as virtuous and the Greek/Portuguese/Spanish/Italian role as debauched in order to justify forcing most of the costs onto the southern Europeans.  Greeks should, according to this logic, bear almost the whole burden of sacrifice while the German companies and banks who profited for decades from an unfair currency structure and predatory lending should pay minimally.  

“It won’t work.  The burden on Greece and others is too great for them to bear.  By worsening, rather than ameliorating southern depression, Germany ensures those countries failure.  Squeezing Greece the way the allies squeezed Germany after 1918 can only lead to the fracturing of Europe.  

“…Germany is exploiting the euro crisis to impose on Europe a system that will be structured by German rules and dominated by German power.”  

Others see it the same way it seems.  This is from Criton Zoakos, at Leto Research:  

“A collapse of Germany’s export markets in the Eurozone’s periphery has posed a challenge to its commitment to remain the world’s pre-eminent advanced exporting nation. Germany is meeting this challenge in a twofold way: it is making great efforts to develop new markets for its exports among the BRICS, and it is pushing hard to convert the Eurozone periphery from export markets into sources of large amounts of cheap labor. If the BRICS are the future destination of German exports, the PIIGS trapped in the Eurozone will ensure competitive labor costs and a competitive Euro exchange rate.”  

There are major problems with Germany’s grand strategy to grow as the world’s premiere export nation; here are a few:

1) The global demand dynamics have changed considerably as the private sector de-leveraging continues in earnest (i.e. thanks to the balance sheet recession in the US particularly).

2) There may not be enough demand from the BRICS, as they fight for similar portions of the export pie given their export models, in the same vein as Germany.

3) The US and China know the game Germany is playing and will not play the role of patsy as the weak states in the Eurozone have been forced to play.

4) Germany underestimates US capabilities at its own peril.  Expecting a straight-line US decline is a big mistake, I believe, given the rising angst amongst US citizens and voters. A few major policy change dynamics, in terms of either defense policy, i.e. forcing NATO to start paying for itself (which means Germany), or a new US industrial policy that allows US corporations to bring home cash and provide siginificant incentives to build domestically, could change the balance of competition quickly.

5) And a brilliant point from Mr. Zoakos as it relates to the where real sustained growth flows; it is not about exporting of existing supply of goods:  

“As a rule, sustainable growth originates in the supply of new, innovative goods and services provided by entrepreneurial activity – the type of supply that creates ex nihilo its own demand. There was zero demand for telephones before Alexander Bell invented them. There was zero demand for personal computers before the creation of the first PC with a workable operating system, and so forth. Supply of pre-existing goods and services does not stimulate growth once it has satisfied market demand: Once the supply and demand curves intersect, the marginal rate of profit in the given industry reaches zero, meaning that the given industry stops contributing to macroeconomic growth.”  

So far, not even the US government has been able to destroy the innovativeness of most American entrepreneurs.  The US was declared dead on arrival—heading into decline, once before by a major world export power, it was Japan at the time (as Germany and China are declaring the same now).   

I remember vividly a story I read in The Wall Street Journal, it was back in 1986-87 range.  At the time, you may remember, Japan was about to swallow up the globe. It was the world’s second-largest economy and destined to become number one, racing past the US, we were told by those great seers back then a la the usual gang of simplistic regression analysis-thinkers so common among our top global financial types. Mr. Japanese Finance Minister (or Foreign Minister) said: “Europe will become our boutique and America will become our farm.”  Oops!  That didn’t seem to work out so well now did it?  

Germany seems increasingly hubris-filled as the outline of its next grand strategy for total European control seems to be heading toward fruition. But once again, I believe its plans will be thwarted, as many PIIGS captives inside Europe and those with out interests outside are on to the game. 

Hope everyone has a great weekend.


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1 Comment

  1. Nicholas Kellagher
    Nicholas Kellagher April 02, 07:17

    cool article Chad
    like the bit about US entrpreneurship
    dont forget the germans build some pretty good cars – and a lot of v hi quality mechancial and electrical goods
    I think demand for these products will run for quite a while

    Reply to this comment

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