Lagarde's Jackson Hole Comments Provide Key Signals For The Euro And The U.S. Dollar

Includes: FXE, GLD, UDN, UUP
by: Simit Patel

Newly-minted IMF head Christine Lagarde made some key comments in a speech at the recent Jackson Hole Summit that have just been published on the IMF web site. I highly recommend investors and traders, particularly those with positions in the Euro and US dollar, review Lagarde's comments. Below is my interpretation of some of her comments.
A push for greater unity in the Eurozone. The supranational takeover is on; Lagarde writes,

Europe needs a common vision for its future. The current economic turmoil has exposed some serious flaws in the architecture of the eurozone, flaws that threaten the sustainability of the entire project. In such an atmosphere, there is no room for ambivalence about its future direction. An unclear or confused message will add to market uncertainty and magnify the eurozone's economic tensions. So Europe must recommit credibly to a common vision, and it needs to be built on solid foundations -- including, for example, fiscal rules that actually work.

A call for fiscal unity requires greater cessation of national sovereignty; whether or not the people of the member European nations tolerate this remains to be seen, and I view that as the decisive factor in determining the fate of the Euro. If Lagarde and the IMF get their way, the Euro will survive, the debt of member nations will likely be consolidated, and new rules will be introduced to create greater fiscal unity. Will these rules be enforced by the IMF? I believe they will.

Greater stimulus in the US. Regarding the US, Lagarde also states that:"...halting the downward of spiral of foreclosures, falling house prices, and deteriorating household spending" is necessary. Basically, Lagarde is calling for intervention to thwart a deflationary spiral, but makes no mention of debt cancellation. Without any form of debt cancellation, stimulus injected into the economy via Federal Reserve repurchasing programs and artificially low interest rates is what will likely occur -- which is, of course, what we have seen since the crisis kicked into high gear in 2008. The results of this have been an increase in food and energy prices, a rising stock market and bubbles in certain sectors (such as Internet IPOs). Such policies have proven to be bullish for metals as well.

In sum, Lagarde's prescription amounts to little more than more of the same. The endgame is really when Lagarde pushes for the IMF to take a greater role in creating global monetary policy, regulating exchange rates and issuing its own currency to ensure trade balances between nations are resolved. The wild card is whether or not the 6+ billion people on planet Earth will accept this, or whether political revolutions will prevent the IMF from wielding the influence it desires.

For speculators, I believe Lagarde's comments are bullish on gold, silver and US equities. I'm inclined this will be bullish for the Euro/US Dollar exchange rate (NYSEARCA:FXE), although I'm much less confident in that, and prefer to view EUR/USD primarily through the lens of technical analysis.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.