EurAnalysis

I don't have time to go into too many details as I am heading out shortly for the morning and will not be back until NY open.
In a nutshell the market sentiment is waning due to disappointing earnings data on Friday plus the fact that the current form of QE3 has pretty much run its course. I expect more risk aversion to surface this week as the focus will be more on US corporate earnings than on anything else.
As for Europe, I don't expect an aid request from Spain any time this week.

Yes I have noticed that. On a monthly perspective, I fully expect the EUR/JPY to make its next macro move to the upside, slowly heading towards 122.00 area by some time next year.
However, that will only be due to the next credit disaster which is Japan thereby causing a flight of capital out of the JPY.

Did you also happen to notice that the falling wedge on USD/JPY has already broken out and is setting up the pair for a mother of all rallies towards 96.00?

So consider this... If the USD is leading the charge and the EUR is following behind, which way will EUR/USD be biased towards?

Looks like the shallow pullback which makes me more confident about a push higher, everything acting as expected today but I had my pending sitting at the lower demand option so I'm still flat.

Long time spent accumulating down there, was a nice push lower early in Asia to fill at a better price, I am expecting continuation north, but there is still actually a few obstacles to be tested first, hopefully we see a strong drive through and not an aimless drift from here.

P.S It's quiet in here!

Where's the morning update PT? I want a refund

Special Sunday Pfennig
A Review of Recent Global Stimulus Announcements

Last week's Pfennig and PfriendsSM incited a good number of replies from both sides of the political aisle. We try our best to keep apolitical in presenting our views on the markets, but keeping politics out of any conversation during the last few weeks of a presidential election is like trying to keep Chuck from watching the Cardinals during baseball's postseason.

Unfortunately, last week's Pfennig and Pfriends was penned prior to the curiously strong employment numbers released on October 5th; I certainly could have added the Bureau of Labor Statistics into the discussion. OK, I know I will catch some heat on calling the data curious, but there is certainly a dichotomy between the weak non-farm payroll data and the big drop in the unemployment rate. But I will leave that discussion to the political blogs, and stick with some observations on the impact of some of these recent macro events. No matter which side of the political debate you find yourself, there is little doubt that the recent moves by global central banks will impact financial markets for years to come.

The Federal Reserve's “highly accommodative” policies
If it suddenly seems as though all of the world's major central banks have jumped on the stimulus bandwagon, you've got it. That's exactly what's been happening. The global economy has been slowing, and central banks across the globe have decided almost in unison, to give the equity traders exactly what they have been wanting, a flood of liquidity.

Let's begin our review with our own central bank, the Federal Reserve. At the conclusion of the most recent meeting of the Federal Open Market Committee (the group that sets policy for the Fed), it issued an announcement that included the following: “To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

In that September 13 announcement, the committee made it clear what it meant by “highly accommodative.” It would launch a third round of quantitative easing, purchasing $40 billion worth of mortgage-backed securities every month for an indefinite period. This will be in addition to the $45 billion in Treasury bonds it is already committed to buying through Operation Twist. Taken together, that comes to $1 trillion over the next 12 months in Fed efforts to stimulate the economy. In addition, the Fed also said that it would keep interest rates at 'exceptionally low levels' for another two years. It will do this by maintaining a target range for bank borrowing (the federal funds rate) of 0 to .25% “at least through mid-2015.”

Wall Street was delighted with the news. After the announcement, the Dow and the S&P soared to their highest levels in five years. Gold and silver also rose, although all three came down a bit after the initial euphoria wore off.

Unemployment remains a big problem
The Fed made it clear that it is more concerned about job growth and our anemic economic recovery than it is about any immediate threat from more inflation. Prior to last week's dramatic drop, the official unemployment rate in the United States had remained above 8.1% for more than three years. That's bad enough.

But when the numbers of people who have stopped looking for work, have gone on disability, or have been forced to take part-time jobs instead of the fulltime employment they would prefer are taken into consideration – the broader unemployment rate in this country is reported to be over 19%. That is a level that hasn't been seen since the Great Depression of the 1930s. No wonder the Fed is concerned!

It is worth noting that a summary of the Federal Reserve's Open Market Committee meeting last month stated the voting members were almost unanimous in their decision to expand the stimulus program. According to reports, there was only one dissenting vote. This means that even longtime opponents of quantitative easing on the committee now support the Fed's stimulus efforts. Clearly, they are very concerned about the lack of improvement in the economy.

The rest of the world jumps on the bandwagon
But it isn't just our own central bank that has promised more stimuli. Mario Draghi, the president of the European Central Bank, announced that the ECB would buy “unlimited” amounts of European sovereign debt, in an effort to stimulate the economies of Europe.

This follows a ruling by the German high court that the European Stability Mechanism does not violate that country's constitution. The court did declare, however, that the German parliament must approve any additional increases to the ESM. At the moment, Germany is liable for around 27% of the 700 billion euro total, or 190 billion euros.

Shortly after the US and European announcements, Japan joined the party. The Bank of Japan announced on September 19 that it would expand its own stimulus program. It plans to increase the amount of debt it purchases by a factor of eight, from 10 trillion yen a year (around $126 billion) to 80 trillion yen. It will continue the purchases throughout 2013. So Japan has also joined the trillion-dollar stimulus club.

At the same time it announced its new stimulus program, the Bank of Japan also did away with its previous minimum bids for Japanese government bonds. Previously, the floor had been set at 0.1%. Under the new rules, the yield on Japanese bonds can go below zero. In other words, buyers at the end of the loan period could receive less money than they invested, making a negative return on their investment.

What's an investor to do?
As we learned in Economics 101, when the supply of something increases, the price (or value) of each unit goes down. That is why many analysts say that another trillion dollar's worth of quantitative easing will cause the “price” of the U.S. dollar – that is, its value when compared to commodities and other currencies – will decline.

Here at EverBank World Markets, a division of EverBank, we are very proud to offer clients innovative ways to diversify into assets that are likely to go up in price when the value of the U.S. dollar goes down. We believe the first key to creating long term wealth is to protect what you have already earned. It is much easier to hold on to what you have vs. going out and earning more. Central banks across the globe are racing to pump more liquidity into the markets, and a result of all of this fresh liquidity (whether intended or not) is a race to devalue their currencies.

The dollar, euro, and even the yen are beginning what will likely shape up to be a race to the bottom. Diversification through the addition of metals and foreign currencies could be one of the best ways to protect the value of your financial portfolio.

We look forward to helping you protect what you have earned, by showing you innovative ways to diversify beyond the U.S. dollar.

Sincerely,
Mike Meyer
Assistant Vice President
EverBank World Markets, a division of EverBank
800.926.4922

P.S. If you'd like to submit a question, please post a comment on this article at DailyPfennig.com.

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CurrencyMan: It is a free service and very informative each day !!!

Had to step out this morning on some urgent personal business.
I'm back now, but to be honest, it is pointless posting an update now as it's a typical slow Monday and nothing has changed since my last update on Friday. So in the interest of not repeating the same outlook and forecast today, I shall remain quiet and publish something new and exciting tomorrow.

I am even considering eliminating the Monday update unless some significant event takes place on Friday or the weekend.

Seems pretty busy to me. Right now EURUSD have moved 87% of daily range (I'm US EST) vs. markets 60%. So a lot of activity in EURUSD. In the greater scheme we are in an uptrend and might be completing several retracements. If we clear 1.3050 - 1.3070 the we are on the way to 1.33 - 1.35 area - possibly all the way to 1.40 area.

If not then the test of the 1.3050 area might very well be the final before a substantial retracement on the July-September uptrend.

1.30 makes the days range. Because of all the extra activity today so far we could statistically extend the daily range by a large margin.

My thoughts only. Comments appreciated.

Have a great day!

I am not certain I understand the scenario fully. I would think that if the USD starts getting safe haven flows once more, it would mean the euro would start falling. But at the same time, if the euro follows dollar lead vs the yen, then wouldn't the euro inevitably rise vs the dollar?

Any explanation to the above scenario would be much grateful.

its due to some uncertainties in the fundamental factors. during this period of trading, technical setup use to be violated easily.Also during this period you dont marry any trade.

I cannot even begin to imagine how a break above 1.32 can be justified, let alone sustained enough to reach 1.40. However, I am not psychic. I just see the current fundamentals as prohibitive of such a move.

Anyway, as busy as it may seem to you, this pair is still relatively comatosed and going nowhere. In the short term 1.3070 is the top and 1.2800 is the bottom. Until we break one of these levels, nothing has changed in my view.

That all depends on which one gets out of the gate first and which one risis the quickest.
Both EUR/JPY and USD/JPY are in a falling wedge pattern but USD/JPY has already broken out whilst EUR/JPY has not and may still need to consolidate a bit more before it does. Ultimately it all depends on US corporate earnings season and any new developments in the Euro debt crisis.

Admittedly the US is in a dire mess. However it is my view that should there be an economic recovery, it will be the US that leads it and not the EuroZone. In such a case, the Fed will be under pressure to tighten monetary policy a bit. Under such conditions (tightening), the USD will inevitably rally against all or most other currencies as the already price in hope/fear of further easing will have to be unwound.

In the case were the numbers are awful and risk-aversion kicks in, then again, the USD will appreciate on safe haven flows.

So either way, my view is a bearish EUR/USD. Will it happen this week? probably not. This month? perhaps. After the US elections? Most probably. Till then, welcome to rangeville.

IMO fundamentals don't need to justify anything Humans will be humans, ever optimistic and perpetually wrong.

I'm not a psychic either (would be nice though).

What are the fundamentals that support a lower EUR more than a lower USD?

If I look at the US trade deficit for the last 15 years (possibly more) we have a substantial imbalance between Europe and the US.

The US continue to import more than they export. The US is in debt to their eye balls and something need to give.

Perhaps by devaluing the dollar we would see a more sustainable trade balance.

Can the US devalue on it's own. That's the big question but in my opinion - yes they can - and I suspect that's what we will see in the years to come.

That would justify 1.40 or even much higher.

Would it be bad for the Europeans - yes definitely - but that does not mean it could not happen.

Fundamentally it makes a lot of sense for the US to adjust the EUR upwards.

http://www.census.gov/foreign-trade/balance/c0012.html

Yes I can see that you have joined the crowd of over optimistic and perpetually wrong

On a serious note, there is a pattern developing here. QE1 had the most impact. QE2 had less impact that QE1. Operation twist kept it going a bit longer although there was even less of an impact. The latest QEternity program only lasted as long as the speculation before the announcement.

My personal conclusion: The bubble has reached its limit. Smart money is sidelined. Dumb money is over-pumped. Vulture hedge funds are perched on the highest trees waiting for right time. The end is near. However, there is a glimmer of hope that yet another bubble will start inflating... The ultimate US housing bubble version 2. If it materializes, then it is the USD that will gain from it in the short to medium term.

Technically, USD is still in a positive cycle and has just undergone a much needed healthy correction. The next move is up.

DXY (Daily)

I agree with your observations, but you are missing one point. The US can only devalue their currency until they start going against their mandate of price stability. Inflation has already started to creep in and will probably be the determining factor for the USD's value going forward. The Fed may not tighten but the market will believe that they will and as such will start reversing their anti-USD positions in anticipation of the next macro move.

Furthermore, trade balance is not the sole determining factor when comparing the two economies (EU and US). There is a much more significant factor and that is politics. In November, the US presidential elections will pretty much determine where fiscal policy is going. However, in Europe, the only solution is full fiscal and sovereign union... and that's not about to happen any time soon. So, in the meantime, they have the fiscal compact which enforces unrealistic Greek style austerity measures on the weaker nations. Such austerity has reached its limits in Spain, Italy and Greece and yet the results are even worse than the original problem.

In-order for EURUSD to continue its epic journey up to 1.32 & 1.40 it must have support from the Crosses & cousin GBPUSD.. for that scenario to happen, all pairs must take-out or over-shot their respective Weekly trend lines..
Over the S/T all pairs had risen in unison from Euro 1.20 & are currently @/near their respective Weekly trend lines with recent D1/W1 side to down PA..
For swing & position trading, the bigger picture HTF PA is king where as one could get scare pip'less looking at mini term & intra-day moves..

EurJpy GbpUsd EurGbp EurUsd W1


XauUsd EurCad EurAud DXY W1

I doubt it. My biggest fear right now is that the FED will be behind the curve for a long time (if not forever) when it comes to tightening. And this is what will become destructive for the dollar. The only way the dollar can appreciate in this situation is when the U.S. recovery deviates rather strongly from other major economies in a positive way. But, should the U.S. LEAD the recovery, then the old game will again be back in town where global growth will only mean lower dollar. Noone wants tighter policy in the U.S. and should the FED surprise with a rate hike the market will simply panic into strong risk off. Sure, that's good for the dollar but not for the right reasons. Simply put, the FED's rate should be above euro's and britain's and the real interest rate also growing to get some backing for the dollar. Hoever, with the current mindset i just don't see that happening. The only thing the FED wants is a new bubble (a new private debt pyramid scheme) that'll cause short/medium term good unemployment rate. It just doesn't matter what is being sacrificed to get it.

Currently, the dollar is holding firm because global growth is at stall speed with continous worries over eurozone, U.K. and china. That's a lot of worries!

If QE is not backed up with real econ numbers then it simply doesn't have an effect on the dollar.


PS. The FED is already going against their mandate when it comes to inflation. As i said: It just doesn't matter what is being sacrificed to get jobs. You can now read what's on Bernanke's mind. He's fully aware that a policy tightening will be devastating to markets which has a serious threat to spill over into real economy which will ruin all his confidence boosting efforts.

Bernanke wants to get a boom so he can tighten hoping that a self sustained recovery is already in place.

It's interesting actually that Bernanke thinks he's playing a positive sum game. That manipulating with monetary policy is such a crafty action which will cause the economy to grow MORE when easing while contracting LESS when tigheting. Go figure.

Cautiously long and correct for the last couple of months

No, really, I'm not optimistic at all. As far as I'm concerned all developed economies are currently unstable, as I don't believe humans are capable of controlling spending given a fiat money system, especially the US with it's reserve status - it demands deficits. As far as I can see, most of the implied economic growth over the next decade or two is based on ponzi math and accounting gimmicks

I'm not so much Euro bullish (more long term - see below), I'm more USD bearish. Bernanke has shown his hand, or at least his intentions - avoid deflation at any cost, devalue to dollar, keep pursuing misguided policies (don't they all really) and pumping juice into the system. In a sense he's not completely misguided, in that he is doing a decent job of battling deleveraging deflation, however I mean misguided in the sense that it is doing very little for jobs, his espoused target for QE-infinity.

Anyway, as for not being quite so bearish on the Euro these days (but definitely agreeing it's a stupid idea) is that the most likely candidate for leaving the Euro is Greece.

Quite simply if they actually want a chance at recovery, they must leave and build an exporting base (tourism, small manufactures etc.) with a devalued currency - probably a few other PIIGS also should leave.

But what does that mean for the Euro? For me it seems that the Euro would appreciate if the weaker countries left. I may be wrong about that, but for me the logic seems reasonable. In any case I see Greece leaving eventually.

I also am aware that reserve currency status ends at some point - it's impossible to say when, I'm sure it can continue longer than anyone really expects, but the US is overstretched and doesn't have anyone willing or able to cut any spending meaningfully. Sisse will come and tell me I'm wrong, that the US markets are the most liquid and will be No.1 for ever etc etc - there's not much I can say, I think you are dreaming if you think the current path is sustainable or that anyone has the balls to stand up to Washington lobbyists and actually cut the ridiculous defense spending/tell people they can't have all the benefits they have promised. IMO they are Rome, and they will debase.

Nooo.

the determining factor for the dollar will EQUALLY be both: inflation AND the Fed's mindset. Noone plays the "If X then Y happens" game. CB's, especially the FED, are veeery flexible nowadays. Heck, that's what was proved with the new round of QE. The market will NOT believe in the Fed's tightening until they actually hear those words (or hints) from the chairman.