Despite extreme volatility in the equities markets last week, trade in the euro was subdued. The early Monday low, followed by a rally to 1.4516, and a close around 1.44, gives the EURUSD a respectable performance. We took out the trend line above the market, but were unable to hold. The direction of the move from the evolving pennant remains a mystery. Open interest in the CME futures market was stable, though the daily trading volume was high.
The European debt and banking crises remain unsolved. Another euro crisis meeting has passed, with Merkel and Sarkozy glibly assuring Europhiles all is well, as they adroitly kicked the can down the field.
It is hard to fool all the markets. At week's end the yield of both US and German ten-year paper was around 2.10%, quite a drop from 2.28% for the US and 2.36 for the German last week. We wonder how much of the money flow into the ten year paper, was caused by fear of recession, and how much is fear of the euro debt situation?
Recessions like hurricanes should have names, or at least initials. Should one be confirmed in 2011, as the new data arrives, maybe we should name it M for Merkel, or perhaps S & M to include her French buddy.
The Swiss National Bank intervention has, to date, been successful against both the USD and the euro. Should equities continue their swoon, we wonder if the SNB will again have their resolve tested. There was a mysterious swap this week, a $200M loan by the US Fed to the SNB. The two major banks in Switzerland, UBS and Credit Suisse (NYSE:CS), deny it was for them. Is there a USD shortage in Europe?
Will the BOJ learn some lessons on intervention from the Swiss? Since the intervention, the yen has gained strength again, checking out the low made last March. In the futures market, the spec longs remain in large numbers, undaunted by the BOJ. If another feeble unilateral intervention occurs, it will be tempting to then buy this currency.
Next week US markets may be wary of a pending speech in Aspen by Fed Chairman Bernanke. His QE 2 caper was announced at the event last year. The result of QE 2 according to Larry Kudlow in his column from August 17th was summarized:
Let’s take a quick look at Bernanke’s QE2 record of pump-priming: The dollar fell 12 percent on foreign-exchange markets. The consumer price index jumped over 5 percent at an annual rate. And the $600 billion cheapening of the greenback led to skyrocketing commodity prices, including oil, gasoline, and food. That oil-price shock is one of the principal factors behind the 0.8 percent first-half economic stutter. As a result of the jump in inflation linked to QE2, real consumer incomes slumped badly and consumer spending fell substantially.
Before QE2 the economy was growing about 2.5 percent, even though it was already blunted by numerous tax and regulatory obstacles. But the cheap-dollar oil shock came perilously close to pushing us into recession.
Pretty strong words, and it is hard to believe Bernanke was responsible for all of this. It may, however, explain why a QE 3 is political suicide for Bernanke, his banker friends, and the Washington establishment. Nevertheless, the anticipation may make an interesting week in late August, 2011.
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