The US dollar exchange rate fell victim to a selling frenzy Friday afternoon that no one can explain

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

The US dollar exchange rate fell victim to a selling frenzy Friday afternoon that no one can explain. On the hourly chart it is a shocking move, from 1.2560 around 9 am to 1.2884 by 1:30 pm ET, or 324 points in under four hours. The Dow-Jones newswire reported that the move was triggered by the break of a key resistance level that set off a flurry of stop-loss selling, but other than that, the press ignored the move. The WSJ says there was a euro spike (but the US dollar remains set to rise), while the FT website doesn’t even have a currency story update as of 5:30 am ET.

Market News says the move was set off by a big hedge fund trade that triggered a series of cascading stop losses.

On Sunday night as Asia came in, the euro exchange rate took another jump upward to 1.2992, perilously close to the round number 1.3000, but then started to fall back. So far today, the euro is at 1.2781 at 8 am, or down about 50% of the upmove from early Friday. If it continues past the 62% Fibonacci level, about 1.2738, the whole thing could be over.

What is not over is the dollar/yen rise.

On Friday, the US dollar slumped against the yen along with everything else. But as the Asian day progressed and especially after Europe came in today, the dollar spiked to 94.95 - twice. This was a 200+-point rally is under 12 hours, or in the bigger picture view, 780 points since Jan 21, about one month. Again, note the reluctance to print a round number. In this case, the US dollar high is higher than on Friday and over the highest high so far this year (Jan 6 at 94.64).

Might the dollar/yen get back to 110.67 from last August?

Some foreign exchange forecasters say so.

The 50% retracement of the dollar’s downmove/yen upmove from 110 would be 98.86, or nearly 99…. Again, near the key round number of 100.

You have to wonder if foreign exchange traders are fighting their inner OCD, like Mr. Monk.

Pounds to US Dollars = 1.4340
Pounds to Euros = 1.1275
Euro to Pounds = 0.8865
Pounds to Australian Dollars = 2.2100

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
Forex Trading Reports - Click for a free trial

Buying Euros? Buy Euros at the best euro Rates!
Buying Dollars? Buy US Dollars at the Best Dollar Rates!
Buying Australian Dollars? Buy Australian Dollars at the Best Australian Dollar Rates!

Contact IMS Foreign Exchange + 44 207 183 2790

But for the moment, a new optimism about the eurozone is in the air

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

The US dollar exchange rate is correcting downward after a big move up earlier this week, in part as a purely technical response to an overbought condition and in part because German Finance Minister Steinbrueck announced yesterday that Germany may be stepping up to the plate to offer "emergency" financial aid and leadership to the rest of the eurozone countries. What form this might take is unclear but Chancellor Merkel is holding a press conference later today (4:15 GMT) with EC Pres Barroso, so we might get details.

From the midday low in New York yesterday at 1.2510, the euro has swooped up to 1.2723 or over 200 points in less than 24 hours.

A German initiative could be a watershed moment, since the ECB lacks the authority to and operating capability to assist on the fiscal front. The eurozone lacks institutional depth - it has no combined Treasury/Ministry of Finance, let alone a State Dept and the other functions of a political union. The eurozone is little more than a customs union with a common currency. To address this shortcoming is a major step forward.

The announcement may bode well for the future of the euro but perhaps a little less well for the idea that the eurozone is a band of equals. By Germany taking a leadership role again, as at the beginning of the customs union, it is again clear who has the most self-interest at stake in the survival of the euro. To be fair, Germany has already sacrificed much for the sake of the eurozone, chiefly in the form of the cost of reunification of East and West, and it looks like it will be doing it again. This is both pragmatic and idealistic at the same time. Since Germany was willing to spend only €480 billion in stimulus funds last fall, the willingness to take on massive new debt is also a sea-change - if that is what is happening.

Or are our imaginations running away with us? If the German "leadership" turns out to be weak, insufficient, or not accepted by the others, the euro exchange rate could be punished. We are also skeptical of a comment reported by Bloomberg from an analyst in Singapore that "The markets may begin to perceive that the U.S. economy will fare worse than those of other major countries. This is likely to be negative for the US dollar." We don’t buy it at all. The US economy is bigger, more robust and more adaptive than any other. That doesn't mean it makes the right policy choices or that it is destined to succeed - the probability of failure is not zero - but the idea that it will fare worse than other countries, even mighty Germany, is improbable.

But for the moment, a new optimism about the eurozone is in the air. The euro exchange rate correction has already gone to the limit of the usual correction after recognition of an oversold level, about halfway up the breakout bar. If the euro rate breaks the linreg channel of the current move at about 1.2950, the whole ball game could change.

A dose of skepticism is proper. Today the Bundesbank in the monthly report renewed its usual statements that the German government must promise to reduce deficits once the crisis is over to maintain investor confidence. Pump-priming is fine but will take time to get a grip, and in the meanwhile, a plan to reduce deficits has to be made and believed. "Past experience has shown that it is easier to reach a consensus on expanding deficit spending than on the necessary consolidation of public finances afterwards. After all, confidence in the long-term sustainability of public finances is a condition for the success of government stimulus measures."

So how would a German rescue plan line up with the BBK's strict ideas about keeping to the Stability Pact, since Germany is already at the 3% cap? Clearly if Germany is going to buy the paper of distressed countries (Portugal, Italy, Ireland, Greece, Spain), it will have to get a waiver from the EC and the ECB. This is kind of like a hall pass… and doesn't address the source of the most recent crisis, Eastern Europe. It’s unthinkable that Germany would rescue Hungary, Poland, the Czech Republic and other non-members-isn’t it?

In other Foreign Exchange market news, Barclays says the Canadian Dollar is about to change direction (and recommends traders to sell the US dollar in a 9-month timeframe). Risk aversion could take the Canadian Dollar to 1.30, but that’s about it. "We see the Canadian dollar emerging with a cyclical growth profile that is as good as or better than that of the U.S. dollar, with far fewer structural and policy negatives." The Bank of Canada will start raising rates ahead of the Fed, and Canada will spend less on stimulus, too. We say it’s ridiculous to imagine that the Canadian economy can fare well when the US economy contracts. Canada is joined at the hip to the US.

Pounds to US Dollars = 1.4338
Pounds to Euros = 1.1270
Euro to Pounds = 0.8868
Pounds to Australian Dollars = 2.2100

Bye For Now

Barbara Rockefeller
Foreign Exchange Trading
Forex Trading Reports - Click for a free trial

Buying Euros? Buy Euros at the best euro Rates!
Buying Dollars? Buy US Dollars at the Best Dollar Rates!
Buying Australian Dollars? Buy Australian Dollars at the Best Australian Dollar Rates!
Contact IMS Foreign Exchange + 44 207 183 2790

exposure to Eastern Europe caused the euro exchange rate to fall

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

The US dollar exchange rate held flat against the euro exchange rate yesterday in a range of 1.2725 to 1.2825 and without direction, but overnight the news that Moody’s may downgrade a slew of European banks because of their exposure to Eastern Europe caused the euro exchange rate to fall off a cliff from 1.2765 to 1.2656 in a single hour. After that the euro exchange rate has crept a bit lower to 1.2600 at the lowest. The euro rate went on the defensive also because of a new rise in risk aversion on falling equity markets worldwide yesterday.

Technically, it was helpful to the dollar exchange rate that the euro failed to match and surpass highs last week, putting in a series of lower highs. Some foreign exchane analysts now say the eurozone’s financial sector woes could take the euro rate down to test the Oct 28 low of 1.2329 in a flash. We note that the channel bottom on the hourly chart by 6 pm this coming Friday is 1.2126. Do not expect such a level at a speedy pace - prices never move in a straight line.

We are not getting the usual opposite effect in dollar to japanese yen, where the US dollar rose to 92.76, breaking last week’s high and possibly marking the beginning of a new move in the yen. Some forex analysts think that Japanese risk aversion has already been satisfied - i.e, everyone who was going to repatriate trading and investment money to yen has already done so. It won’t be long before we start hearing about the “normal” March repatriation flows that supposedly push the yen up as the Japanese fiscal year comes to an end on March 31. This is a myth. We get a rise in the yen in March less often than we get a drop, but a couple of years it was true and in size, so the story lingers. This time we have the dreadful GDP numbers yesterday to contribute drag to any yen rise.

Pounds to US Dollars = 1.4400

Pounds to Euros = 1.1174

Euro to Pounds = 0.8947

Bye For Now

Barbara Rockefeller

Foreign Exchange Trading

Forex Trading Reports - Click for a free trial

Buying Euros? Buy Euros at the best euro Rates!

Buying Dollars? Buy US Dollars at the Best Dollar Rates!

Buying Australian Dollars? Buy Australian Dollars at the Best Australian Dollar Rates!

Contact IMS Foreign Exchange + 44 207 183 2790

Moody’s is gearing up to downgrade banks

Foreign Exchange - Currency Outlook

The euro exchange rate and Japanese yen each fell on news related to their economic performance and financial sector outlook. In Japan, GDP contracted 12.7%, the most since 1974, and in Europe, Moody’s is gearing up to downgrade banks because of their unsustainable exposure to faltering Eastern European economies. In sum, the us dollar exchange rate is rising across the board on perception that "it’s worse elsewhere" than the US, which is taking aggressive measures against the global economic downturn. The US stimulus package was signed yesterday and the Obama administration will propose a mortgage bailout plan tomorrow.

bye for now

Barbara Rockefeller
Foreign Exchange Trading
Forex Trading Reports - Click for a free trial

Buying Euros? Buy Euros at the best euro Rates!
Buying Dollars? Buy US Dollars at the Best Dollar Rates!
Buying Australian Dollars? Buy Australian Dollars at the Best Australian Dollar Rates!

Contact IMS Foreign Exchange + 44 207 183 2790

Euro exchange rate needs to match and hold the end-Oct high at 1.3300 to believe that the dollar rally is really over

Foreign Exchange Outlook : The US dollar is starting to make some gains this morning after losing 648 points in the euro exchange rate from last week to yesterday morning (1.2433 last Friday to 1.3081 at 9 am yesterday). This could be a function of the foreign exchange traders buying euros to an overbought level ("too far, too fast"), in which case it’s a correction that reaches support around 1.2860 and a 50% retracement around 1.2760.

That’s if the euro rate upside breakout is the real deal, which is the outcome we get in two of three model systems.

If the euro move up was itself a correction of the bigger and longer-lasting euro downtrend, we may have seen the end of the correction. How you see it depends on the timeframe of the chart you are looking at. In the model system shown in the charts in this report, we do not yet have a true upside euro breakout, although it’s pretty scary. Looking beyond the euro, we see prices crossing over the short-term moving average, linear regression, or previous intermediate high in many cases.

One thing that a lot of analysts agree on-we need to see the euro exchange rate match and hold the end-Oct high at 1.3300 to believe that the dollar rally is really over. The high yesterday was 1.3081, or about 220 points under the benchmark. We would need to see it get hit and held before next Monday, which is going to make the rest of this week and Sunday night a fingernail-chewing, hand-wringing ordeal. The US closes shop early today for the Thanksgiving Day holiday tomorrow and while banks are open on Friday, it’s another short day. So here’s the question: do the Asian and European markets have the guts to set the trend in the absence of the US?

Market News sums up the situation neatly: "Foreign exchange market players do not trust the stock market rally seen last Friday and Monday, and therefore have little faith that the gains seen this week in the euro, sterling, Australian Dollars and Canadian dollars will be sustainable. The rise in stocks was being viewed as a "bear market correction," with renewed equity slippage likely when the rally has ended." According, the dollar exchange rate should come back up when these markets fall back down.

A second factor is emerging - old-fashioned fundamentals. For once we are seeing the Foreign Exchange market react to economic data and institutional responses to the economic crisis and not only knee-jerk reactions to developments in related markets like stocks, the so-called risk aversion theory of exchange rate determination. Pounds Sterling, for example, is well down from its high of 1.5534 yesterday to a low of 1.5290 so far on the 0.5% drop in Q3 GDP and associated gloomy data that reinforces the prospect of some big rate cuts to come.

Risk aversion still has a good grip, though, and as usual, it can be seen best in the Japanese yen. Dollar vs Japanese yen slumped from the Monday high at 97.42 to 95.45 at the US close yesterday and thence to 94.69 overnight, although it’s bouncing upward ahead of the US open. Sterling to Japanese yen is right on its hand-drawn support line on the hourly chart and probably breaking it today. A 50% retracement would take sterling down to 143,10 from the high of 148.61 yesterday. Euro to Japanese yen is also floppy, having run up from 116.39 last week to 126.24 on Monday. So far it has touched the 38% retracement at 122.48 and may do it again today, in which case the expectation would be for a further correction to 121.32 (50%).

This doesn’t make the Japanese yen a runaway or a screaming buy. If Foreign Exchange Traders like what they see as a necessary and sufficient government response to crisis - i.e., if confidence is at least partly restored, the US dollar will be rejected as the safe haven as Forex traders feel comfortable taking on more risk. The yen will get sold as the other half of carry trades into the higher yielders.

But Market News Asia reports this morning that "The failure of Asian stocks to continue their recent rally led to concerns among investors, who then cut positions inyen crosses. UBS said "At present we continue to see firm market demand forsafe-havens and the general flight to liquidity remains intact and there doesnot appear to be any shift in the perception of U.S. paper to serve this purpose. In addition, the overwhelming force of de-leveraging is firmly in place,especially in a weak growth environment."

Confused? You’re not alone.

Seeing the dollar/yen or any other yen cross rates a barometer of risk aversion or risk appetite is not working out too wellthese days.

Bye For NowBarbara Rockefeller
Foreign Exchange Trading
Forex Trading Reports - Click for a free trial

Buying Euros? Buy Euros at the best euro Rates!
Buying Dollars? Buy US Dollars at the Best Dollar Rates!
Buying Australian Dollars? Buy Australian Dollars at the Best Australian Dollar Rates!

Berlusconi government will announce a €80 billion stimulus package

Euros Exchange Rate Outlook: German import prices fell 3.6% m/m in Oct, the most since records began in 1962. Import price inflation is just 2.9% y/y, the lowest in a year.

The EU is going to reveal a region-wide stimulus plan today, but the FT carries a confusing story on it that doesn’t contain any hard information other than that the EU will not follow the UK in cutting VAT. Bits and pieces are dribbling out. On Friday, the Berlusconi government will announce a €80 billion stimulus package, with an emphasis on employment. This week Sarkozy promised the French auto industry that he wouldn’t let them down.

French consumer confidence rose today while business confidence crashed yesterday. INSEE’s French revised consumer confidence index rose to -43 from -46 in Oct, a 6-month high. The Italian business confidence index dropped to 72.2 from a revised 76.9 in Oct, a 15-year low.

Euro Pounds exchange rate currently 0.8400

Barbara Rockefeller
Foreign Exchange Trading
Forex Trading Reports - Click for a free trial

Buying Euros? Buy Euros at the best euro Rates!Buying Dollars?
Buy US Dollars at the Best Dollar Rates!Buying Australian Dollars?
Buy Australian Dollars at the Best Australian Dollar Rates!

Euro Exchange Rate : The European Commission said growth will slump to 0.1% next year

Euro Exchange Rate : The European Commission said growth will slump to 0.1% next year, having entered recession this year. It’s the worst growth picture since 1993. GDP will contract for three consecutive quarters this year for a full-year total of 1.2%, European finmins are meeting today in Brussels to try to figure out what to do. Bloomberg notes that “While France and Germany led European governments in committing a combined $1.7 trillion to protect the region's banks, and the European Central Bank now offers unlimited loans in an attempt to get credit moving, there has been no unified government response.”

EU Commissioner Almunia said the EU needs better coordination in some areas. The situation is "precarious" as demand from emerging markets is easing (goodbye., exports), although inflation pressure is also easing. The euro exchange rate is closer to fundamentals and the eurozone economy will reach bottom in mid-2009. Seven members will reach deficits breaking Maastricht/Stability Pact with deficits over 3% in 2009. In fact, the Commission will start the "excessive deficit procedure" against Ireland. Oh, and the EU will not allow any new members in until after spring 2010 - they might want some money.

In hard data, the eurozone October manufacturing PMI fell to 41.1 from 41.3 in the flash estimate and 45 in Sept, the lowest ever. In Germany, the October manufacturing PMI fell to 42.9 from 43.3 in the flash and 47.4 in Sept. It was worse in France--40.6 compared to 43 in Sept. Italy had the worst manufacturing PMI ever at 39.7, from 44.4 in Sept. A number under 50 means contraction.

Best Euro rate to buy euros currently 1.2400

Buy For Now

Barbara Rockefeller
Forex Trading Reports - Click here for a free trial

Buying Euros, Best euro rates contact IMS Foreign Exchange

the ECB will cut rates next week

Euro Exchange Rate Outlook:

ECB chief Trichet did hint yesterday that the ECB will cut rates next week-it’s possible, he said. The market took no notice. This is the dog that didn’t bark in the night. For Trichet to say such a thing and the foreign exchange market not to move is remarkable. One foreign exchange trader said Trichet has been marginalized by events. We can’t buy that. Institutional events like central bank interest rate cuts are the top factor in short-term moves. What is going on? We deduce that either it was expected and so already built in, or that the unwinding of euro to japanese yen carry trades is a bigger force and since Trichet’s comment was “with the wind,” it was absorbed without the need for comment.

Pounds to euros currently 1.2520

Euros to pounds currently 0.7979

Buy for Now

Barbara Rockefeller
Forex Trading Reports

Buying Euros? Call IMS for the Best Euro Exchange Rate +44 207 183 2790

Bid-offer spreads have widened dramatically and the amounts that can be done at even widened spreads have shrunk

Hi All,

We asked the meaning of the phrase “dire liquidity” in a Market News report yesterday, and Market News obliged with a full report on worsening conditions in the supposedly liquid Foreign Exchange market. Bid-offer spreads have widened dramatically and the amounts that can be done at even widened spreads have shrunk. This phenomenon is across the board from majors to emerging market currencies. In the Mexican peso, the usual spread was 15 points and good for $5 to $10 million. Now it’s 100 points wide and good for only $1-2 million. In the Australian Dollar exchange rate, the normal 1-point spread used to be good for $10 million, but now it’s good only for $1 million. If a client wants AUDUSD 100 million, the spread goes from 9-10 points to 40-50 points. In the euro exchange rate, the spread for €50 million used to be 3 points and now its 5-7 points. Market News goes on to cite reports showing a big and steady unwinding of unhedged long-term investment positions in emerging markets -and also in Europe.

Buy for Now

Barbara Rockefeller
Forex Trading Reports - click here for a free trial

We remain astonished that what started as $200 billion in failed US subprime mortgages could have turned into $3 trillion in global losses

Foreign Exchange Outlook : The global financial system is under severe stress, and so is the global economy. Ripple effects are only just now starting to appear in places like China, which was partly insulated from the free-market world but can’t hide forever. It’s interesting that the richest entities are the ones in the most denial that everything has changed-the oil producing Middle East as well as China. OPEC is busy trying to raise prices in a world of falling demand, which seems particularly foolish. Of course, these are the very countries that are getting richer by the minute as their dollar reserve values go up, but these reserves may be needed for domestic spending if their exports, whether oil or socks, start falling apart.

We remain astonished that what started as $200 billion in failed US subprime mortgages could have turned into $3 trillion in global losses, showing that even financial professionals are having a hard time grasping the extent of the leverage that was out there and still remains. It’s easy to see how nonprofessionals are bewildered by the collapse of pyramid-upon-pyramid, including our presidential candidates. We think only two things are clear;

1. the bottom will come only when US housing bottoms, no matter the state of deleveraging at the time.
2. And the US economy will survive, however tattered. It is literally too big to fail. But other sovereigns are not too big to fail.

We already have Iceland and Argentina. Well, Argentina is too easy a target for sarcasm. It always fails the minute the wind blows. The most interesting aspect of this whole debacle is that not one single analyst or commentator is calling on G7 or the new summit group (that will include China) to deliver a global rescue. Everyone seems to assume that no major Bretton Woods-level response is likely or maybe even possible. That’s because you need capital controls to enforce such things, and the US is against capital controls.

At some point in this trend the currencies will bounce up and at some point the trend will reverse, but in the meanwhile, keep the faith—the US dollar is the safe place to be.

Buy for Now

Barbara Rockefeller

Forex Trading Reports - Click her for a free trial

Buying Euros? Buying Dollars - Need to Buy Australian Dollars?

Contact IMS Foreign Exchange +44 207 183 2790 for the best exchange rates

French banks were unwilling to tap the government fund in case it made them look weak

Euro Exchange Rate Outlook : The French government shoved €10.5 billion of its €40 billion rescue plan down the throats of the 6 biggest French banks today, a bit like food down the gullet of a goose. Until the government forced the issue, French banks were unwilling to tap the government fund in case it made them look weak. The stocks of all the banks rose on the announcement that Credit Agricole will get €3 billion, BNP Paribas will get €2.55 billion, SocGen will get €1.7 billion, and so on.

It’s interesting that the form of the capital injection is not preferred shares, as elsewhere, but subordinated loans at the base rate plus 400 bp. According to the FT, “the loans are repayable after other debts have been met, do not dilute existing shareholders and do not require a change in dividend policy. Nevertheless, subordinated debt can nonetheless be used to increase the banks’ tier one capital ratios, a main measure of balance sheet strength.

The Euro exchange rate today is still very weak as a result and the pounds to euros exchange rate is currently 1.2900

Buy For Now

Barbara Rockefeller
Forex Trading Reports - click here for a free trial

Buy Euros at the best euro exchange rates

call IMS Foreign Exchange for a free quote +44 207 183 2790

Buying Euros - watch the 1.3650 pivot against the US Dollar Exchange Rate

Euro Exchange Rate Outlook : The US dollar appears a little stronger this morning against the majors, with the euro exchange rate having dipped to 1.3347 from 1.3624 at 6 am ET yesterday. But this disguises a lot of choppiness. After the close yesterday, the euro rose from 1.3440 to 1.3517 and then fell again during Asian hours to 1.3343-only to rise back to 1.3518 by 7:40 am ET. This surpasses the interim high late yesterday and so is cause for concern, although we won’t get worried until the euro exchange rate matches a pivot level around 1.3650.

The US dollar to Japanese Yen is also soft as the US day begins, having firmed yesterday from 101.12 to 99.24 overnight. Fear of today’s US data and stock market are pressuring the dollar to Japanes yen higher 100.77 so far today, seemingly on the idea that the US stock index futures, which are rising this morning, will lead the dollar. This may be correct - currency traders are in thrall to global stock indices these days. Bloomberg says “The Japanese Yen weakened on speculation that investors will slow carry trade reversals.” That takes a minute to digest. Sterling, likewise, looks heavy on the re-emergence of risk aversion ands presumably the unwinding of quickie carry trades. Exchange Rate for buying euros against the pound is currently 1.2800

Buy For Now

Barbara Rockefeller
Forex Trading Reports

Buying Euros, Buy Euros at the Best Exchange Rates call

IMS Foreign Exchange for a free quote +44 207 183 2790

Why are the ECB and the Euro Exchange Rates not being punished for foolish policy choices?

Foreign Exchange Outlook : The IMF chief economist said this is the greatest shock since the 1930’s but should not turn into another Great Depression because the policy response this time will be the right one. The major countries will not raise interest rates and has instead cut them, trade protectionism will be resisted, and so on. But what about the public’s response? Is it possible that governments can do the right things and we get a Great Depression anyway? Bloomberg points out that yesterday the VIX, a measure of fear in the stock market, reached an intraday record high of 59.06.

Stock markets are not economies but have many of the same participants. Stock market participation in the US is exceptionally high, with well over 60% of individuals having some association with it, if only through a pension fund or IRA. At what point does the government, any government, intervene in the stock market to boost confidence? It is seldom done-the number of instances can be counted on the fingers of one hand (Hong Kong during the Asian crisis, Japan via state-owned entities at various times). We doubt that the US would do it-Congress would scream-but hey, you never know.

This is a new form of moral hazard-that once the Treasury decides it can buy preferred shares, it selects its investment targets according to the free-market fortunes of certain stocks. This would be truly awful and raise all kinds of questions about insider trading, stock price manipulation, backdoor deals, and so on.

The US reputation for honesty and transparency has already taken near-fatal stabs to the heart by Enron, WorldCom, various option pricing scandals, executive pay, and so on.

How much more can it take?

We agree that preferred shares are a better fix than buying toxic paper and praying, but it must be handled with kid gloves and in the middle of a well-lit stage.

Anyone pinning hopes on G7 tomorrow and Saturday is making a mistake. Treasury Sec Paulson said yesterday that "When we look at the G-7, we have very different countries, economies of different sizes, financial systems with different needs. And so it would not make sense to have identical policies." What he really means is that monetary policy has little to contribute now-although the coordinated action yesterday had a good effect and gave a nice appearance, as though somebody is in charge-but fiscal policy and institutional change are now the keys to a real and lasting fix. As noted before, the eurozone doesn’t have a joint fiscal position. There is no federal budget of any consequence. Therefore, it’s up to each country to fund their bailouts as best they can, and national differences and quirks are only to be expected.

Does this mean the euro-zone is in a weaker position than the US? Not necessarily. These guys are not second-raters. They have already accepted that budget deficit constraints (3% of GDP) need to be thrown out the window. What else do we need? Each country’s plan doesn’t have to be coordinated with everyone else’s plan to be effective. The real problem lies with the big multinationals that have fingers in every country, like ABN Amro, ING, Deutsche Bank and the British banks. As we saw with Iceland, we could end up with governments suing each other. Iceland doesn’t have the cash reserves but most EMU countries do, or the capability to tax it into existence. This will be fun but not fatal if it’s the UK suing (say) France, but it will be less fun if it’s Poland suing (say) Germany. We have no evidence that this will be the outcome, but it’s an interesting idea. More interesting is how Europe is going to reduce leverage without triggering failures. This is still under the radar but it seems obvious that leverage of 50x is a fire waiting for a match.

Meanwhile, European banks are still bidding like mad for dollar funding from the ECB at rates reaching 10% yesterday, although it was down to 5% today. With Fed funds at 1.5%, this is an extraordinary premium. Usually overnight money is cheaper (due to the absence of reserve requirements), not more expensive. We will know that trust and confidence has returned to European banking when these rates come down. What if they do not come down? At a guess, it means the European banking crisis has further to go. European banks are almost certainly in worse shape than US banks at this point.

What does this have to do with the level of the euro exchange rate? It’s murky. The rising euro rate is a sign of confidence in European institutions, including especially the ECB. We find this mysterious, since the ECB raised rates only in July, evidently not having read Mr. Bernanke’s book on the Great Depression, which repeats the accepted wisdom that the Fed raising rates in 1930 was precisely the wrong thing to do. Why are the ECB and the Euro Exchange Rates not being punished for foolish policy choices?

If and when the US and UK do these things, the pound and dollar exchange rates get punished.

Well, it’s the Teflon euro.

We see this effect repeatedly. For example, money supply growth never once hit ECB targets during the entire life of the ECB but the euro dollar didn’t get sold off because of it. We offer only the idea that the idea of monetary union is such a fine one for countties that had spent 1000 years fighting wars against one another that the markets are willing to overlook little things like 50x leverage. Does this make sense? No. But it’s a lesson in why Big Picture macroeconomic analysis doesn’t help much in forecasting exchange rates.

Charts are more realiable. This time the chart is saying that the pullback in the euro is just that-a corrective pullback. We will not Buy Euros into it as a reversal for hundreds of points more, probably not until it breaks the channel top resistance over 1.4200 or 1.4300. We can try to buy the euro correction, but beware-it can spit in your face. As for the Japanese Yen, the US dollar got a boost on short-covering on the Paulson announcement that the Treasury can do preferred shares-but Japanese companies are still planning as though the break below 100 is the real deal and they are in for an ordeal. Euro to Japanese yen is going to be very interesting-what is the real driver?

Buy For Now

Barbara Rockefeller - Forex Trading Reports

Buy Euros at Best Exchange Rates - Call IMS Foreign Exchange +44 207 183 2790