Forex Trading Commentary EUR/USD, GBP/USD, EUR/JPY April 12, 2012
Well trading the 3rd push chop is always a bit riskier but yesterday I have to say it was me who messed up my trades. I had a nice EUR/JPY short running and stepped away from my desk after I got my stop to break even only to return and see the market had run 50 pips in my favor and was now withing 10 pips hitting my BE stop. Oh well on to the next trade right? So I patiently wait for the next set up which eventually comes but this time I take the 20 pip hit. Things happen right? Well sure my next trade short on the EUR/USD is still running with the stop at BE and looking good at this point.
The charts today really are not much different than yesterday. We havent had a clear break lower as I still expect and if memory serves me I did warn that we could stay in this chop for a few days before something gives a good reason to break. Yes there are plenty of real facts that say the Euro and Pound should drop however Mr. Market is holding them up at the moment. I still think the break down is more probable and the EUR/USD has tested the hourly 200ema and been rejected while the GBP/USD has been trying to slam the highs from Tuesday and finding support at its hourly 200ema so a stop run above that level is possible and as we can see the triangle pattern I would expect the Smart Money to take advantage of such pattern traders at this point. The EUR/JPY still looks the best to me since even though it made a push up yesterday it was rejected by the 3rd push lows and during the Asian session has not has much desire to test up again.
In the news
The releases during the London session are fair with the ECB monthly bulletin being the big one as we will find out what is going through the minds of the banksters there and what tricks they may have up their sleeve anyway. Other than that there is Eurozone Industrial Production and the UK Trade Balance of which both could have a decent reason for some manipulation if there is a surprise.
Otherwise the US has a few big releases along with 2 Fed members speaking. The first being Dudley (speaking twice) who is a well known “lets just print more money” dove so keep that in mind even though his speech is shown as a low impact event. The other being Lockhart who is a moderate if memory serves. Then we also have PPI, Core PPI, Trade Balance and Unemployment Claims all of which could make the market jittery with and big deviations or most of them disappoint.
As I looked through my favorite news sources this morning I came across another good article from my favorite gloom and doomer Graham Summers. I have to say I agree with him and like him I thought things would correct (blow up) long ago. Not because things were so bad they were out of control but thats what the boneheads in charge should have let happen rather than think they can just push the much needed correction down the road for somebody else to deal with on a much grander scale. If you do much reading on economic issues it really can be simplified down to a small business. If Mom and Pops Grocery goes too far in debt and makes bad investments in stock that they take losses on and cant pay their debt what happens? They go bankrupt and most likely out of business for a time but then they can have a fresh start to learn from their mistakes and start a business that has a much better chance of success. Thats the same thing that should happen with larger businesses dont you agree? Well not in the world we live in today. I really think its worth reading Grahams entire article but here are a few key points that really stick out in my mind.
The following is an excerpt from a client letter published back in mid-March. By the look of things, this forecast is playing out precisely.
For starters, unemployment in Greece as a whole is now over 20%. For Greek youth (aged 15-24) it’s over 50%. The country is in nothing short of a Depression.
Indeed, Greece has now experienced five straight years of contraction bringing the total contraction of Greece’s GDP to 17%. To provide some historical perspective here, when Argentina collapsed in 2001 its total GDP collapse was 20% and this was accompanied by full-scale defaults as well as systemic collapse and open riots.
With new austerity measures now in place there is little doubt Greece will see a GDP contraction of 20%, if not more. I expect we’ll see other “Argentina-esque” developments in the country as well. Put mildly, the Greek issue is not resolved.
The one thing that would stop me here would be if Greece staged a full-scale default. While the political leaders and others view a total default as a nightmare (and it would be for Greek pensions, retirees, and many EU banks), it is only a total default that could possibly solve Greece’s debt problems and allow it to return to growth.
Defaults are akin to forest fires; they wipe out all the dead wood and set the stage for a new period of growth. We’ve just witnessed this in Iceland, which did the following between 2008 and 2011:
1. Had its banks default on $85 billion in debt (the country’s GDP is just $13 billion).
2. Jailed the bankers responsible for committing fraud during the bubble.
3. Gave Icelandic citizens debt forgiveness equal to 13% of GD.
Today, just a few years later, Iceland is posting GDP growth of 2.9%: above that of both the EU and the developed world in general. In plain terms, the short-term pain combined with moves that reestablished trust in the financial system (holding those who broke the law accountable) created a solid foundation for Iceland’s recovery.
The European Banking System
- According to the IMF, European banks as a whole are leveraged at 26 to 1 (this data point is based on reported loans… the real leverage levels are likely much, much higher.) These are a Lehman Brothers leverage levels.
- The European Banking system is over $46 trillion in size (nearly 3X total EU GDP).
- The European Central Bank’s (ECB) balance sheet is now nearly $4 trillion in size (larger than Germany’s economy and roughly 1/3 the size of the ENTIRE EU’s GDP). Aside from the inflationary and systemic risks this poses (the ECB is now leveraged at over 36 to 1).
- Over a quarter of the ECB’s balance sheet is PIIGS debt which the ECB will dump any and all losses from onto national Central Banks (read: Germany)
So we’re talking about a banking system that is nearly four times that of the US ($46 trillion vs. $12 trillion) with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for the US), and a Central Bank that has stuffed its balance sheet with loads of garbage debts, giving it a leverage level of 36 to 1.
And all of this is occurring in a region of 17 different countries none of which have a great history of getting along… at a time when old political tensions are rapidly heating up.
As you can see this is an old publication but sure looks like hes getting closer to the crunch date when something may just have to give. We will see.
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