The Dead Parrot

German politicians are now daring to say in public what everyone has known for sometime, namely that Greece is heading for bankruptcy and that it will leave the Eurozone.

Philip Rösler, German Economy Minister, wrote in Die Welt:

"In order to stabilise the euro, we must not take anything off the table in the short run.

That includes as a worst-case scenario an orderly default for Greece, if the necessary instruments for it are available."

Rösler has recognised that Greece's problems cannot be solved by the Eurozone (ie Germany, the largest provider of funds for Greece's bailouts).


What are the "necessary instruments" to which Rösler refers?

Horst Seehofer, state premier of Bavaria, has helpfully provided the answer. He told ZDF that Greece must leave the Eurozone.
 
"If, despite all their efforts, the Greeks do not manage, then you can't rule out this possibility."

In fact the executive committee of the CSU, the sister party to Chancellor Angela Merkel's Christian Democratic Union (CDU), will today approve a motion that calls for highly-indebted states to leave the eurozone.


The wheels for removing Greece from the Euro are now in motion, the only question is will the expulsion of Greece be enough to stop the rot?

The answer to that is "no".

The Euro, as an experiment in its current form, is finished. Sadly, for the people who live in the Eurozone, the "political elite" of Europe refuse to see that reality and will continue to wreak economic havoc in Europe and beyond, by continuing to prop up the "dead parrot" of a currency until the very end.

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Inflation Near To 2% In Two years

The Bank of England has stated that, in its view, inflation will be near to the 2% mark within the next two years.

This view is contrary to some of the prophets of doom who have recently been predicting (for media sound bite purposes) that interest rates will have to be raised significantly (8%), in order to counteract an inflationary disaster.

Additionally, given the better than expected growth figures for the UK economy, the Bank has held back from another round of quantitative easing (unlike the Federal Reserve).

This, in terms or international politics, is probably no bad thing. The US QE2 package of $600BN has provoked a barrage of criticism from both Europe and Asia Pacific, and brought the world one step closer towards "currency wars" (capital restrictions, protectionism etc).

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Currency Wars

Dominique Strauss-Kahn, the head of the IMF, has warned that cuts in interest rates and quantitative easing (as recently announced by the central bank of Japan) could upset the global economy recovery and trigger "currency wars".

The Japanese central bank is reverting to a "zero interest rate" policy (which it abandoned in 2006).

Given that both the US and UK have cut rates and instituted quantitative easing, Mr Strauss-Kahn's comments seem a little "behind the curve".

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The End of Sterling?

Jim Rogers, who co-founded the Quantum fund with George Soros, has told Bloomberg:

"I would urge you to sell any sterling you might have. It's finished. I hate to say it, but I would not put any money in the UK".

In the short term Sterling will undoubtedly fall further (and many people who short it will make fortunes out of its demise). Indeed Sterling today fell below $1.40 to its lowest point in over seven years, because of concerns about the banking crisis and debt levels.

However, currencies strengths are relative. No other developed country will escape the recession. The Euro will, in the not too distant future collapse as the folly of the "inflexible" high interest rate policy of the ECB is laid bare. The Dollar will also fall as America's economy worsens.

Sterling will rise again.

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Careless Talk Costs Cents

Alistair Darling is learning the lessons that previous Labour Chancellors have learned, namely that careless talk costs the pound dear.

Sterling continued on its downward path today, falling to a 12 year low (88.2) against the Bank of England trade weighted index of currencies and to its lowest against the dollar ($1.7669) since April 2006.

The fall has been attributed, not unsurprisingly, to Darling's outburst over the weekend over the state of the economy.

The fact that he is now barely on speaking terms with his old "friend" Gordon Brown have given the markets little comfort, as divisions over policy and presentation between number 10 and number 11 mean that the economy will suffer.

Until Brown and Darling decide what the real story is, and what to do about it, the economy will continue to decline.

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Forex Fridays

Bernanke made public statements supporting the dollar on Tuesday and Wedndesday:

Federal Reserve Chairman Ben Bernanke's warning this week about the dollar's steep fall marks the latest step in a Bush administration effort that began in November to use stronger rhetoric to try to prop up the sagging U.S. currency.

The stepped-up rhetoric comes as the world's economic powers prepare to gather in Japan next week for the Group of Seven meeting. The dollar, along with the U.S. economy, is expected to be a key topic of discussion. International concerns about the dollar have been growing as Europeans, in particular, fret about the falling dollar's impact on their exports to the U.S.

The article also made this observation:

The increased focus on the dollar represents somewhat of a gamble by Messrs. Paulson and Bernanke. Their bet is that as the housing crisis subsides and the Fed finishes cutting interest rates, the dollar will climb -- making their rhetoric seem like it is having an impact.

ECB President Trichet said something similar on Thursday:

European Central Bank President Jean-Claude Trichet said Thursday that inflationary pressures in the euro zone will last longer than previously expected, with risks to price stability increasing further in the wake of robust food and oil prices.

The ECB may even raise its 4.0% interest rate, left unchanged on Thursday, at its July meeting, Trichet said. "I don't say it's certain, I say it's possible," he said.

Inflation trends have put the ECB in a state of "heightened alertness," Trichet said after the Governing Council meeting in Frankfurt.

.....

His more hawkish slant was further underscored by the bank's new staff projections for economic growth and inflation over the next two years. Inflation in 2009 is seen at around 2.4%, Trichet said.

Any projection for inflation in 2009 above 2.3% is "an unexpectedly hawkish signal," said Holger Schmieding, an economist for Bank of America.

"A number of us (on the Governing Council) "thought there was the case for raising rates," but Thursday's decision was taken by consensus, Trichet told reporters.

So -- we have dueling central bankers (as it were). The only difference is Trichet has a history of acting on his statements, whereas the US is the talker not the doer in the central bank world. That's a big difference and it boils down to a massive credibility gap for the Fed.

Let's start this week with the euro and review it's weekly chart:



This is a great bull chart. Notice the prices have continually advanced through resistance and then consolidated gains. Also notice the shorter SMAs are above the longer SMAS and all all the 20 and 50 day SMA are moving higher. The 10 is curving lower right now and prices are caught between the 10 and 20 day SMA.



On the daily chart, notice that prices consolidated at the end of 2007 and beginning of 2008. They broke through resistance in late February, peaked in late April and have come down a bit since. Right now prices are bunched up with all the SMAs in s a consolidation pattern. But notice the big pop today after the ECB comments.



The yen has been in a rally since mid-2007. Notice that as the index rose prices took time to consolidate gains. Also note that consolidation was sharp. Right now prices have dropped below the 20 week SMA which will contribute to that SMA moving lower. Also note the 10 week SMA is about to cross below the 20 week SMA which is a bearish development.



On the daily chart, notice that prices advanced from the beginning of the year through mid-March. Since then they have come down a bit and consolidated horizontally. Note that prices and all the SMAs are bunched together right now, indicating a lack of direction.



One of the nest examples of a bearish chart I have ever seen. Prices have been moving lower for two years, with prices continually breaking through support to make new lows. Note the 20 and 50 day SMA are both moving lower. The 10 week SMA is about to move a bit hight, but it has done this before at the beginning of the year with no success.



On the daily chart, notice the dollar has rallied a bit since the end of April. Also note that prices are above the SMAs which will pull them higher. Bernanke's statements jawboning the dollar may help in the short run, but we'll need action for this chart to turn around.

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Friday's Forex Round-Up

Let's start with a long-term chart of the dollar:



Remember we're dealing with an incredibly weak chart. Prices have been dropping for the better part of to years, with prices continually breaking through downside support and making new lows. This had been going on for two years -- long before the economy started to slow. That means traders saw fundamental problems with the economy long before big drops in GDP started to show up.



On the daily chart, notice that Prices formed a consolidation triangle from mid-March to the end of April. Then prices rallied out from that pattern. However, prices have had a hard time maintaining any upside momentum. Prices have now dropped below all the SMAs. Also note the 10 day SMA has crossed below the 20 day SMA and the 50 day SMA is at best even. A few weeks ago, the general consensus was for the dollar to rally. Now it doesn't look that hot.



The Euro has been the direct beneficiary of the dollar's drop. Notice the euro is in the middle of a multi-year rally with a strong uptrend in place. Also notice that as prices rallied, they also consolidated their gains in several places, allowing traders to digest price action and plot their next move.



On the daily euro chart, notice the broadening pattern at the beginning of the year and the upward sloping wedge pattern from the end of March to the end of April. Prices dropped from there and fell below the SMAs. But notice how the euro has bounced back and moved through all the SMAs. Also note the 10 day SMA has moved through the 20. This chart is turning around, although it's not time to say with confidence it's completely bullish.



On the weekly yen chart, notice the strong rally that started in the middle of last summer -- right before the US market started to tank hard. Also notice that as prices have rallied, they have also fallen back in several triangle patterns to consolidated gains. Finally, notice how the week chart uses the 20 week SMA as support.



The yen broke through upside support in mid-April, but formed a solid downward sloping channel starting in mid-March. Since the beginning of May prices have been moving sideways as traders await the next big move.

So -- what can we discern from all this?

1.) The dollar's "comeback rally" isn't shaping up that well.

2.) The euro may be turning around, but we can't make a solid call yet.

3.) The yen is waiting to see what happens.

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A Closer Look At the Currency Markets

Let's take a look at the daily and weekly charts of the three big currencies -- the dollar, the euro and the yen.



Notice the dollar was in the middle of consolidation pattern from late November 2007 to late February 2008. The dollar fell through support at this time and has since been in the middle of another consolidation pattern between 71 and 73. Prices and the 10 and 20 day SMA are bunched up at this level, indicating traders don't have a firm idea about where they want to send the dollar.



On the weekly chart, notice a clear bear market. Prices are clearly moving lower and have been for the last two years. Prices have continually moved through support to make new lows. Currently the market is forming a triangle consolidation pattern.



On the euro's daily chart, notice how it is nearly a mirror image of the dollar's chart. The euro consolidated from late November to late February, broke through upside resistance and has formed a consolidation triangle pattern over the last month or so. Prices and SMAs are both moving higher, although they are also a bit bunched indicating a lack of direction.



Here we also have a near exact opposite of the dollar. Prices have continually moved higher. There are pennant consolidation patterns along the way and prices have continually moved through upside resistance.



On the daily yen chart, notice that prices have broken through support. However, they still are around the 50 day SMA level where they were at the end of December. However, this is the last area of support for the yen, so if it wants to keep in it's rally it has to, well, start rallying from this level sometime soon.



On the weekly chart, notice that prices have been rallying hard for nearly a year. They have continually moved through price resistance levels and formed bull market pennant consolidation patterns. However, compare the slope of the yen and euro rally. The yen rally is incredibly sharp whereas the euro's is more gentle. Gentle rallies are better over the long run.

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A Broad Look At the Currency Markets

The currency markets are very inter-related; as one currency drops, another rises. So it makes sense to start looking at a group of currencies to see where money is flowing into and out from.



The dollar has been in a downtrend since the beginning of 2006. It has made a clear pattern of lower lows and lowers highs. Also note the accelerated decline since mid-2007 when the Fed started cutting rates.

The dollar formed a bottom at the end of last year, bounced higher and is now consolidating in either a triangle or flag pattern.



On the dollar's daily chart you can see the consolidation very clearly. I think the most appropriate technical call is a bear market flag, however some analysts may see a triangle consolidation.



The euro has been the clear beneficiary of the dollar's decline. Notice that since the beginning of 2006 we have a clear rally with higher highs and higher lows. We also have a consolidation pattern that starts in late 2007.



Here is a closer look at the euro's consolidation pattern, which is a clear bull market flag. Also note the euro and dollar chart's are a near mirror image of each other for the last two years.



The yen had a rough time from 2005 to mid 2007. The market found a bottom in 2005, bounced higher and then fell to a new low in late 2007. This looks an awful lot like a dead cat bounce to me.

The yen stared a pretty strong rally in mid-2007 making a continued pattern of higher highs and higher lows. However, until it also looks as though the yen is in a giant bottoming pattern for this entire chart (roughly 3 years). Until the yen makes a strong move from this area to say 100 I think we could continue to call the yen in a bottoming formation.



On the daily chart there is a very gentle rally with higher highs and higher lows. But the lack of a serious upward sloping incline makes me wonder about trader's sincerity about the rally. To me, this chart says, "we really want to bid this chart higher, but we're really not sure that's a good idea."

So, what do these charts tell us?

-- The euro and dollar are clearly in direct competition with each other.

-- There is a lot of hesitancy to the yen's chart. The lack of a serious upward incline to the latest rally makes me wonder about trader's underlying conviction. This chart says, "the Japanese economy isn't out of the woods yet, at least not according to traders."

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The Credit Crunch

The ongoing, so called, "credit crunch" may well have repercussions in areas not immediately apparent.

Much of the borrowing used by people/companies for their investments in the bundled debt products that have been over valued, has been financed using cheap borrowed Yen.

This is known as the Yen Carry Trade. Now that the debts are unravelling, so too is the Yen Carry Trade; this has consequences for the Yen itself, as companies liquidate their positions and pay back their Yen borrowings.

The cost of borrowing Yen is rising, as such those trades and investments that were once financially viable are no longer viable.

One area where there has been heavy use of Yen borrowings, both by companies and Japanese housewives, is that of currency speculation in the Turkish Lira. It is very likely that, if the crunch continues, the Turkish Lira will collapse as speculators pull out.

This in turn will severely damage the profits of the Japanese housewives, thus negatively impacting the Japanese economy.

The lesson here is, don't invest what you can't afford to lose.

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Administration Urged to Challenge Japanese Currency Practices

Japan has become the latest scapegoat for protectionist rhetoric in Washington, as Congress urges Treasury Secretary Hank Paulson to use this week's meeting of G7 finance ministers to accuse Tokyo of fixing the exchange rate of the yen.

With the Democrats keen to make their mark on Capitol Hill after their victory in November's elections, Michigan Congressman John Dingell sent the President a letter last week - publicised on his website under the title, 'Dingell to Bush: You Just Don't Get It' - urging the White House to prosecute Japan for currency manipulation.

The yen has sunk to four-year lows against the dollar, and the 'big three' US carmakers, Ford, GM and Chrysler, have argued that Tokyo is 'manipulating' the currency markets by talking down the yen, making imported Japanese cars unfairly cheap.

Asian governments have been subsidizing their exports with a cheap currency for some time now. How else do you think the Chinese have amassed about $1 trillion in US dollars. At the same time, the US has provided various subsidies to various industries over the same time (just look at all of the special interest tax deductions in the US tax code).

I don't have an exact answer for this situation -- Asian government's intervention. But, expect more along these lines for now.

Link

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