25 June 2010


"Euro rises despite weak equities" (CMS) because it is doing exactly what I said it would a week ago, consolidating on the 1 day chart, after a fall on the spikes at the top (4h), from fundamental pressures down on Euro.

It is caught between twin valuation targets, the decision of the Fed to continue to keep Fed controlled interest rates on $ out of the market as a fundamental and the forces pulling Euro downwards. Within this it can technically range. In a sense it has been freed from the Equity market for now.

In fact the Fed decision on interest rates possibly stopped a continued run downwards on Euro (the probe) for now (this was happening and this pressure caused volatile movements downwards even after the decision).

Interesting how the Federal Reserve Board of the United States is supporting the common currency of the European Union. And all in the name of the equity market of the United States. The cheapness of borrowing $ makes it still a source of huge money flows in a carry trade of epic proportions into equities.

Supporting the equity markets is not a bad reason to do this, but equities per se do not need this, nothing is wrong with US companies. The problem is from another long Fed inspired debt issue, the housing bubble (that is what the Fed is supporting, money flows into company shares damaged by mortgage sourced asset deflation).

I am actually a big fan of Bernanke, I am not with those who believe the Fed should be abolished, though I respect their opinion, he is doing his level intelligent best with the situation he was and is being given.

I believe the Fed should be removed from political interference and make monetary decisions. But is this even possible. The ECB is protected from political pressures but it is still making semi-political monetary decisions, since the crisis. The crisis has had one effect, the politicization of monetary policy in Fed and ECB.

However the Equity market must be normalized. It must be restored to a system which values companies on their balance sheets. This it is extraordinary power, and its power for the US and the world. Let the Fed raise interest rates or let the market do it.

One could say though perhaps the Fed are brilliant financial engineers and precisely wanted to free Euro from the US equity market by helping set competing valuation targets. It could be argued this has the effect of letting the market sink more softly and maybe just maybe resetting its internal valuations. Possibly.

6/27: In all events that little boost from EUR on Friday 30 min may have been a belief the G8/G20 will add more government debt (the other source of liquidity). To an extent EUR is enhanced on debt related liquidity measures and this has been a source of its rise since the early part of this new millennium (when US finances got out of control again).

But of course there was a huge price for the euro zone itself to pay for this mountain of debt liquidity as it was sitting on a housing bubble. This is now hurting EUR itself.  It seems Canada, which is biased towards conservative fiscal policies is pushing for debt reduction. It seems as well the US want stimulus to continue (according to CBC news !!!). A combination of Euro debt reduction and $ debt expansion, if it is believable and/or happens bodes well for Euro.

6/28: The reaction of Euro today suggests what was pushing it on Friday was a belief in debt, because what the G20 delivered was amazing, the debt reduction promise of Obama. This touches on something I have alluded to, which is this belief Obama may restore proper functionality to the market.

This isn't a political statement it is just based on what has happened so far, Obama delivers on promises, and he delivers precisely. If he can cut the US deficit, it will be an astonishing boost for the US economy and will finally give those amazing companies genuine capital support.

Obviously this bodes well for $ but what will the result of both Euro and $ taken off debt be...this is an interesting question: think about their functional role as pipes...

These are future comments, because as I have been discussing in twitter for many months and now on my blog it is all about that cheap dollar carry trade right now which produces the risk on/risk off affair - but as I said this isn't functionally about risk, it is about those pipes and how they flow...

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