02 August 2010

Euro Surges

I was reading through all the forex analysts explanations of the behavior of the markets today, especially the way Euro continued its (fundamentally but not technically) unlikely rise, were not analysts on Friday calling for its fall ? I cut through everything until one key phrase, the flow of cash into higher yielding currencies. There it is. One of those currencies is artificially low yielding, the dollar.

That is the conduit and today is how it works. It produces these surges of money flow at a certain state of the markets. It is why it is so apparently technical. Technically as I said months ago, Euro should rise, it hit a huge support level. But those analysts on friday were right, fundamentally it should not.

But a direction and a surge into the conduit produces these illusions, it is like a technical fundamental. However that said, I do believe there is something real as well, a real US recovery, as the data showed today and stock data is suggesting.

It is difficult to make serious analysis from a day's session, but those shares I listed yesterday behaved in interesting ways. The apparently least strong, SAI was not affected by the surge until the end when it moved up. The way money flow works is like this though, it goes from strong to less strong. But perhaps as well that is the recovery in the market as well.

But here is a reason why interest rates should rise in the US. Basically this conduit keeps Euro fundamentals at bay. It is a global rescue of the euro zone because it recognizes that the euro zone made its money from the US and China.

With both those economies constrained, all euro has is debt (and the German economy). Note the actual information in the euro zone data: all the growth was from Germany. And the UK data was a classic well it's not as bad as we thought scenario.

Should the US be supporting the Euro, which is effect it is ? Is there a real point to this. Well, yes cheap dollars keep money flow going and keep US exports competitive. But US exports do not need to be competitive, where they count they are the best. Again a distortion produced by the conduit, this time into the economy itself. If interest rates rose, then this cash would flow into $.

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