The perception that the European Central Bank has firm leadership, which is now providing funds and stability for the weak sovereign debt issuers, has calmed the debt markets, and fostered a modest euro rally. Taking a lead from Bernanke and the US Fed, ECB President Trichet has embarked on a program - providing liquidity to the euro markets, and buying sovereign bonds of dubious risk. The size of this ongoing program remains a mystery. Will Bernanke's expansion of the Fed's balance sheet by a couple of trillion be a goal for the Europeans?
The extent to which the US Fed was involved with the global financial rescue of 2008 was revealed Wednesday. During this crises, the Fed provided $3.3T, with many of these loans made to foreign bankers. The biggest borrower of these funds was Barclays (BCS), tapping in to the Term Auction Facility (TAF) for $232B, as they absorbed the financial corpse of Lehman Brothers. Other foreign bankers involved as top ten recipients of funds from the TAF were the Bank of Scotland (RBS), RBS in the UK, Societe General (SCGLY.PK) in France, Dresdner Bank, and Bayerische Landesbank in Germany, and Dexia of Belgium.
As this story gets more legs, look for the politicians to howl. Already, Bernie Sanders, the lone socialist Senator from Vermont, wants to know why the Fed acted as the Central Bankers for the world. The absence of the ECB from the rescue in the 2008 crises and their tardy and reluctant involvement in the PIIGS difficulties might give the impression that Europe's Central Banker are impotent, and not up to the job.
Will the ECB take decisive action, hoping to aid their constituents, and dispel notions that they are weak? Perhaps their presence was a factor in the successful Spanish auction of $3.3B of three year notes at 3.72%, down 23 bp from the last auction. More of this activity may calm the fears and help the euro for a while. This does not solve the problems of countries with anemic growth, huge deficits and sovereign debt interest rates above, say, 5%. The months are limited for those money pits and the default will be a source of future currency upheaval.
Is it possible that the EUR/USD on the sell off from 1.4280 to slightly under 1.30 has discounted the bad euro news? On Tuesday and Wednesday, the price action in this pair gave us a tweezer bottom at the 1.2970 level. The Tuesday action produced an engulfing candle with a close above the previous day's opening. Thursday, we were trading higher, briefly above the 1.32 handle. The RSI has recovered from a short visit to the oversold territory.
There are some interesting developments in the futures markets. A break under the 1.30 level seems like a logical spot for the stale longs to bail, and the OI would decline. That was not the case. Trade was very heavy, over 500k contracts on both Tuesday and Wednesday, and the OI went up in the euro on those turbulent days. Total euro OI on the last three sessions is up over 18,000 contracts, almost a 10% increase. The fable about the euro bear story is well told, unlikely to cause fresh selling. Someone, however, is now buying the euro. What do they think, and do they have more to buy?
Today we get some important US numbers, including the always volatile NFP report. It is always tempting to sell a rally after a big down, but to us, the market acts like there may be more going on here. Is confirmation of last year's aggressive Fed action going to shame the euro bankers into more aggressive actions lest they be regarded as backbenchers? We are reluctant Friday traders, but should the numbers give us some volatility today, we will be looking to try the long side in the 1.31/1,3150 area.
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Disclosure: No positions