The Global Liquidity Bailout

World Central Banks Announce Global Dollar Shortfall Funding Resolution

What does this mean?

It means that at least one country is close to defaulting, and that this mechanism has been put in place beforehand to stop global financial meltdown.

It also means that the central banks have taken away the responsibility for trying to resolve the economic crisis from the hands of the politicians.

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Trouble Ahead

The Telegraph reports that central banks and official bodies have "parked" record sums of dollars at the US Federal Reserve for safe-keeping.

For why?

It seems that they have lost confidence in the commercial banks.

Reserve funds from "official foreign accounts" have doubled since the start of 2011, with a dramatic surge since the end of July when the eurozone debt crisis spread to Italy and Spain. 

 

Whilst the amounts are (in relation to the global economy) small ($100BN), the increase serves as an indicator of problems that resemble what happened in late 2008.

To add to the indicators of problems ahead, talks between Greece and a visiting troika of international inspectors (IMF, the European Union, and the European Central Bank) were suspended today.

The talks ended abruptly this morning, as there is some disagreement over Greece's ability to meet its deficit targets.

The troika is expected to return in 10 days time.

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The End of The Dollar?

The UN Conference on Trade and Development (UNCTAD) has quite correctly said that the system of currencies and capital rules, which binds the world economy, is not working properly.



UNCTAD blame this systemic failure for the financial and economic crises.



Additionally, UNCTAD have called for a new global currency that replaces the Dollar as a reserve currency.



Given the recent shenanigans in Washington, where the politicians played chicken with the Dollar and the world financial system, it is hardly surprising that the calls for abandoning the Dollar as the global reserve currency are becoming louder. Countries do not want to be held hostage again by the antics of those on Capitol Hill.

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Playing Politics With People's Lives - Epilogue

The bill allowing the President to raise the US debt ceiling has finally been passed by both houses.

Crisis over?

No, the markets have reacted badly to the fall in US manufacturing and have been less than impressed with the political antics on Capitol Hill.

Whilst the politicians who brought about this crisis may feel smug and self satisfied, they should bear in mind that US creditor nations such as Russia and China will never trust them again to deal with economic issues such as this in a sensible and rational manner.

As such the long term prospects for the US economy, and Dollar as a reserve currency, are bleak; thanks to the selfish indulgences of the politicians on Capitol Hill.

Breaking News

China rating agency Dagong downgrades U.S. to A+ from A

And so it begins!

The politicians were warned!

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Chinese Whispers II

AFP report that the Chinese ratings agency (Dagong Global Credit Rating Co. Ltd.) has stated that, because the USA had allowed the Dollar to weaken, the USA is in effect defaulting on its debts.

In November last year Dagong reduced its rating on the US to A+ from AA, citing a deteriorating intent and ability to repay debt.

The Chinese are far from happy with the weakening of the Dollar, as they hold over $1Trillion in Dollar denominated debt.

This issue will cause considerable friction between the US and China.

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Friday Dollar Analysis

Last week I wrote the following about the dollar:

Given the above charts, and the fact nothing has fundamentally changed in the big picture for the dollar, my assessment of the dollar market for the coming week is the exact same as it was for last week: more moves lower with rebounds into the EMAs providing upside resistance

The dollar may be in a position for a technical rebound. Last week there was very little action lower, with prices instead moving in a rounding pattern. There has been a large volume spike over the last week, which may be the sign of a selling climax. Also note the gap higher today and the very strong candle print. There was a strong fundamental reason for the change of direction: dovish statements from the ECB regarding interest rates. I'm suspecting that some of today's action was also some short covering.


So far, the technical indicators are not giving a strong confirmation of a rebound trade. While the A/D and CMF have spiked up, these increases are still new and therefore still possibly transitory. In addition, the MACD is still giving as a neutral reading at best.

The idea of a rebound trade does not mean that the fundamental downward trend that is in place is in any danger of being broken. Prices have still moved through important long-term support levels indicating a strong move lower is already taking place. What is happening is a simple "profit taking" of the shorts. Given the underlying interest rate and fundamental issues underlying each currency, I don't see any reason to the dollar is in danger of a strong rally at this point. But, if you're shorting the market, I would consider taking some profits off the table right now.

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Friday Dollar Analysis

Last week, I wrote the following about the dollar:

Given the above charts, and the fact nothing has fundamentally changed in the big picture for the dollar, my assessment of the dollar market for the coming week is the exact same as it was for last week: more moves lower with rebounds into the EMAs providing upside resistance.

Taking a look at the chart, nothing has changed. Prices are below the EMAs, all the EMAs are moving lower and the shorter EMAs are below the longer EMAs.

This week, we learned that US growth for the first quarter was 1.8%, which means the Fed will be under pressure to not raise rates. In addition, we have the following Fed statement:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

The EU has already raised rates, as has China and a host of other countries. Only the US remains in 0% interest rate land, which will add further downward pressure to the dollar.

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Outlook - Stormy G20 Predicted

The atmosphere at the forthcoming G20 summit in Seoul later this week is likely to be somewhat heated, following on from pre summit soundbites issued by the Chinese and then Barack Obama over the recent move by the US Federal reserve to print $600BN (Quantitative Easing 2).

China, and some other countries, are not happy that this tactic pushes the Dollar lower, thus making their exports to the US more expensive and the lessening the value of their Dollar based investments.

Barack Obama responded, during a press conference in India, by saying that QE2 would bring about higher US growth rates which would be "good for the world as a whole". The US is also of the view that the Chinese Yuan is undervalued, and are pressing the Chinese to let it float higher.

The G20 will see an intensification of this "spat", as various countries begin to draw battle lines over possible future "currency wars".

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China Gives Markets a Boost

China's announcement that it is to end its two year peg of the Yuan against the Dollar, and effectively to allow a managed rise in the value of the Yuan, has given world stock markets a much needed boost.

Any rise in the Yuan will be gradual, as the Chinese will manage its rise carefully. However, markets have taken the announcement as a sign that China is confident about its economy.

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Euro Heads For Parity

The Euro is heading for parity with the Dollar, as markets become increasingly unnerved by:

1 The likelihood of Greece ever repaying its debt

2 The severe austerity packages being introduced in Europe (Italy has just announced a 3 years Euro24BN austerity plan), and

3 The rolling takeover by the Bank of Spain of certain small banks.

Markets, once they build up sufficient momentum, are difficult to stop. The Euro's days may be numbered.

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The Domino Effect

Moving on from the diversion of yesterday's budget, most of the contents of which will probably not come to fruition, the Times reports that European economies are gradually being downgraded one by one.

Ireland
Downgraded from AA+ to AA-
November 2009

Greece
Downgraded from A- to BBB+
December 2009

Turkey
Upgraded from BB- to BB+
December 2009

Portugal
Downgraded from AA to AA-
March 2010

This "death by a thousand cuts" is, unsurprisingly, negatively impacting the Euro which fell to a ten month low against the dollar yesterday.

Downgrades make it increasingly difficult for downgraded countries to borrow from the bond markets, without increasing the rates they pay lenders (thus increasing their fiscal woes).

There is of course the possibility of an EU bailout for countries facing ruin. However, that prospect (for Greece anyway) looks rather unlikely given that Chancellor Merkel has called Greece's bluff and suggested that it should go to the IMF (something that Greece has been bluffing it will do).

The economic solution that the EU needs to face, namely expelling Greece, may appear politically unpalatable. However, it is the only solution that will stop the infection spreading.

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Betting On Failure

Speculators are taking a punt on the Euro falling further, as the fallout from the EU's inability to resolve the Greek tragedy continues.

The Euro is now at a nine month low against the dollar, on the basis of low expectations about the result of a meeting tonight between Eurozone finance ministers.

The Greek austerity plan, formulated by the European Commission last week, is viewed by many as not being austere enough.

The problem is exacerbated by the fact that Greece has knowingly understated its true problems (ie fiddled its figures), and that the Greek government is unable/unwilling to take the necessary measures at home for fear of a backlash from the voters.

It is quite clear that Greece did not meet the conditions necessary for joining the Euro, ie it joined it on the basis of fraudulent information supplied to the EU.

Dishonesty has a price, as the Greeks are now discovering.

The best solution may well be to let it rot and be pushed out of the Euro, thus ensuring that further bailouts will not be necessary.

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Forex Fridays

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There are a few important points on the weekly chart.

1.) Prices have been lower.

2.) The relative strength of prices is currently very weak

3.) There is little to no momentum

4.) We wee a very bearish orientation -- all the EMAs are moving lower, the shorter EMAs are below the longer EMAs and prices are below all the EMAs.




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The dollar has returned to its status of a great chart to show bearish behavior. Notice how the chart continues to print lower lows (points 1, 2, 3, 4) and lower highs (points A, B, C). There are also two downward sloping trend lines that connect the high points of the downward move.

In addition note the bearish orientation of the EMAs (D). All are moving lower, the shorter are below the lower and prices are below all of them.

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Forex Fridays

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A.) Prices continue to move through support and are bouncing lower off the 10 week EMA

B.) The EMAs are in a very bearish posture: the shorter EMAs are below the longer EMAs, all the EMAs are moving lower and prices are below all the EMAs

C.) Prices continue to become weaker

D.) The MACD is decreasing, but

E.) The MACD is approaching the lowest level over the last three years.



A and B.) Prices are in a clear downtrend.

C.) The EMAs are in a very bearish posture: the shorter EMAs are below the longer EMAs, all the EMAs are moving lower and prices are below all the EMAs

D.) Prices are right at key support levels.

E.) The MACD is about to give a sell signal.

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Forex Fridays

The weekly chart shows a clear downtrend. The MACD and RSI are both moving lower. Prices are moving lower and have consolidated losses in at least on triangle. All the EMAs are moving lower, the shorter EMAs are below the longer EMAs and prices are below all the EMAs.



The daily chart shows a move lower but notice that the technical indicators are weakly indicating a lower move. The trajectory -- the steepness of the RSI and MACD -- aren't that severe right now.

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Forex Fridays

The weekly chart shows the strength of the downtrend -- even when the dollar made a second top both the MACD and RSI printed lower. Also note that prices consolidated in a triangle pattern as they fell and then moved lower. Finally, the 10, 20 and 50 day EMA are all moving lower, the shorter EMAs are below the longer EMAs and prices are below all the EMAs.


The daily chart shows the consolidation and fall in more detail. Notice the triangle consolidation pattern followed by the move lower. Also note the EMA picture -- the shorter EMAs are below the longer EMAs, prices are below all the EMAs and all the EMAs are moving lower. Also note the 20 day EMA provided upside resistance for prices last week.

Bottom line -- this is a bearish chart.

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Forex Fridays

The weekly chart shows a security that wants to go lower. The MACD and RSI are both declining. All the EMAs are moving lower. The shorter EMAs are below the longer EMAs and the 10 and 20 day EMA have moved through the 50 day EMA.

However, the daily chart shows there is strong support at the (roughly) 78 area. Prices broke through the lower line of the triangle consolidation, fell to the 78 area and have now moved higher.

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Forex Fridays

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Prices are consolidating in a triangle pattern. In addition, we have a declining MACD and RSI along with a bearish EMA picture (The short EMAs are moving lower, the 10 day EMA has moved through the 50 day EMA, the 20 day EMA is about to move through the 50 day EMA and prices are below all the EMA).


The daily chart shows more detail regarding the consolidation pattern. Note that prices have been moving lower for over a week. While the MACD has given a sell signal notice the lack of sharpness in the overall direction of the indicator. A true sell signal would occur at a sharper angle. That does not make this signal less valid but it is something to consider. Also note the EMA picture is very bearish -- all the EMAs are moving lower, the shorter EMAs are below the longer EMAs and prices are below all the EMAs.

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Forex Fridays

There are two important points to make about the weekly chart. First, the MACD and RSI are signaling a lower move ahead. This jibes with the price pattern which says prices are consolidating in a triangle pattern before a move lower (based on the indicators).



The daily chart confirms that we have a high probability of moving lower. First we see the price consolidation in more detail. Secondly notice the full stochastic is giving an over-bought reading. Stochastics/oscillators are better to use when prices are in a range which they clearly are.

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Forex Fridays

Overall, the downward trend from the double top continues. Prices are moving lower and the MACD and RSI are confirming the trend. The 10 and 20 week EMA are also moving lower with the 10 week EMA going though the 50 week EMA and the 20 about to follow suit.



The daily chart is a great example of bear market rallies -- it contains two. Notice how prices are moving lower but the lower movement is interrupted by several pennant and flag patterns. These are classic bear market corrections.

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