Posts by "aviat72"

VOTE:$1.37-1.45

The Euro Zone has been behind the curve for the past two years. ECB refused to lower rates an year ago sending the USD to the nadir and oil to its zenith, contributing to the financial meltdown. The ECB is in the same boat as the Fed, and the competitive devaluation can wait for so long before the economic situation forces its hand.

The longer Euro-Zone consumption stays low, the worse the Eastern European/Baltic crisis will become, and the greater the potential for a major systemic shock. The ECB/Germans are hoping that US consumption will rise and lift them without forcing them debase the Euro. I think they are smoking something potent to count on the US to bail out their export dependent economies again; but till the German elections are over in September this false reality is unlikely to be questioned.

There is also the call from the US to force European banks to undergo a stress test. If these calls become stronger, we are likely to see greater uncertainty about the European banking system. Though some skeletons will be found, the market will also discount the fear of a major graveyard, given the greater leeway for leverage allowed by Basel-II. Further since European companies rely a lot more on banks than capital markets for the debt, any worse than expected news about European banks will further crimp the banks' ability to finance any economic expansion.

The Euro's role as the default beneficiary of the anti-Dollar trade is going to come under greater scrutiny as it becomes clear that the risks associated with Europe are no way less than the US; they are just being brushed under the carpet. Commodity Currencies are likely to be deemed safer and are likely to attract a greater share of the anti-Dollar trade.

Ashraf:

Thanks for your target on the US-Euro.

(1) If I read you correctly, you believe that the Euro is not at a risk of losing its anti-Dollar status, and the commodity currencies are unlikely to replace the Euro as the primary vehicle for speculation against the USD. I presume the size of the underlying economies is a key factor in determining the role of the currency in the market.

(2) Do you have any opinion on the crisis in Eastern Europe and the risk it poses to the Western European banking system, and hence the Euro. There are some articles out there comparing the US banks to the European banks, which paint a much worse picture for the European banking system, given the amount of leverage Basel-II allows. http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2009/03/02/europe-on-the-ropes.aspx


(3) When it comes to ECB vs. Fed could you point me to some resource which compares their respective roles and powers?

I have read some articles on how the ECB can not buy government bonds from member countries (QE-Euro style). Further, no single sovereign authority and divergent stake-holder needs constrain its reach, and the ability to act. It does make it more independent of political pressures as you noted (and which might turn out to be good), but also limits it power to act.

Ashraf:

FAZ/SKF compound daily. As a result unless we are in a strongly trending market, they will lose value as the daily churn eats up the value. They are primarily day-trading tools and at best useful for swing trading a move. If the financials continue to trade side-ways, both FAZ (and FAS) will lose value.

However if you expect the financials to start a major downtrend with one-sided moves, these instruments will do very well, as they did early this year.