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How the ECB Engineered the Euro’s RecoveryGary Dorsch Trying to pick a winning trade in the foreign exchange market is similar to judging a “reverse beauty” contest. In other words, one must be able to identify the least ugly currency among its peers, at any given moment in time. All paper currencies are considered to be ugly, when compared to the “king of currencies” – Gold, since the central bankers are apt to print vast quantities of fiat currency, at the behest of government officials who have appointed them to run the printing presses. “By this means, government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft,” – observed the late John Maynard Keynes, the father of modern macro-economics. In the arcane world of foreign exchange, the axiom, - “the trend is your friend,” – is a very valuable piece of advice, since trends in currency pairs can extend for many months, or even years, often leading to double-digit returns. The Australian dollar is among the most volatile of currencies, due to its tight linkages to base metals and other commodities, and is now viewed as a global barometer for risk taking. The Euro has also been exceptionally volatile this year, plunging by as much as 20% against the US-dollar to a four-year low of $1.1875, as Europe’s festering debt troubles were sending flashbacks to the Lehman Bros bankruptcy, when paralyzed bank lending had nearly triggered a global depression. Traders are now worried that European banks could face huge losses on some of the $1.3-trillion of loans extended to banks and private institutions in Greece, Spain, and Portugal.
The hysteria over the solvency of the Club-Med countries, - Greece, Portugal and Spain, was whipped into a frenzy, with questions being asked about the long-term viability of the Euro itself. There was speculation that the 11-year-old currency could collapse, if Athens defaults on its debts and opts out of the Euro, in return for setting up its own central bank and regaining the ability to print drachmas. Concern quickly spread beyond a possible default by Greece on its sovereign bonds. Portuguese and Spanish bond yields also turned sharply higher. Private-sector debt in the Club-Med countries is a big worry, because when governments must pay more for financing, so do corporate and private borrowers. Sharply higher interests can deepen an economic downturn, and lead to more corporate defaults. Already, the Euro M3 money supply has been stagnant for six months, with Euro-zone bank loans to the private sector stalled at +0.3% growth from a year ago. Analysts estimate that European banks have lent about 2.2-trillion Euros to Greece, Spain, and Portugal, with about 567-billion Euros plowed into government debt, 534-billion Euros to companies in the private sector, and 1-trillion Euros to other banks. While Greece is the weakest debtor, much more was lent to Spain and its private sector, about 1.5-trillion Euros, compared with Greece’s 338-billion. The ECB estimates that the Euro-zone’s largest banks will write-off 123-billion Euros ($150-billion) for bad loans this year, and an additional 105-billion Euros in 2011. According to the credit default swap markets, Greece is the most likely candidate to default, after 1-year CDS rates catapulted upwards to a record 1,325-basis points, (bps) in April and June, after hovering around 80-bps last year.
In the foreign exchange market, the US-dollar index turned higher against the Euro, British pound, Swiss franc and other currencies, (with the exception of the Japanese yen), tracking the upward spike in Greek CDS rates. The US-dollar, a heavily inflated and debt ridden currency, was utilized as a temporary “safe haven,” currency, - a depository for scared money fleeing the uglier looking Euro. A violent shakeout in industrial commodities, triggered by the sharp slide in Shanghai red-chips, and other stock markets, also swept the Aussie and Canadian petro-dollar lower. The US-dollar index continued to surge higher towards the 88-level, tracking the Greek CDS market, which reached a record high of 1,325-bps in June. At the same time, the US-dollar’s surge made American goods less competitively priced in world markets.The US trade deficit widened to $42.3-billion in May, the highest level in 18-months. The deficit with Europe rose to $6.2-billion as imports rose by 3.2%, outpacing a 1.9% rise in US-exports to that region. Still, the biggest culprit behind the widening US-trade deficit is China. The US-Sino deficit jumped +15.4% in May to $22.3-billion, and now equals 53% of the total US-shortfall. Thus, the US-dollar’s most glaring overvaluation is against the Chinese yuan, perhaps by as much as 40-percent. On a trade weighted basis, the US-dollar index looks increasingly vulnerable to a sustained decline. However, the primary driver behind the US-dollar index is capital flows into and out of global bonds and stocks, while trade flows generally have little influence.
European and IMF officials took quick steps to guarantee Club-Med’s debts, unveiling a €750-billion lending facility for weaker nations to raise capital, at affordable interest rates. Teetering on the edge of default, Europe’s banking Oligarchs averted catastrophe with repeated short-term fixes. The latest bailout is a wealth transfer from taxpayers and flowing directly to German, French and other foreign banks, which are creditors of Greek, Portuguese, and Spanish debt. Among the biggest winners are Banco Santander, BBVA, Société Générale, BNP Paribas, and Unicredit. Euro-zone central banks started to buy government bonds on May 10th, in a reversal of the ECB’s long-held resistance to full-scale asset purchases as it fights to contain Greece’s debt crisis. ECB chief Jean “Tricky” Trichet gave no indication of how much the ECB’s agents were prepared to buy. Boosting its firepower further, the ECB restarted a US-dollar swap program with the Federal Reserve, in order to inject emergency US-dollar liquidity in the global money markets. To read the rest of this article, please click on the hyperlink below: http://sirchartsalot.com/article.php?id=138 ### Gary Dorsch 321gold Ltd |
