Warnings Passed Out By The IMF-World Bank To Europe And Others

Includes: FXE, UDN, UUP
by: Ralph Shell

Preceding the meeting of the ecumenical council of bankers from the IMF-World Bank in Tokyo this week, this esteemed body is busy passing out warnings. According to SpiegalOnline today they said the IMF Demands Swift Banking Union in Europe:

"The International Monetary Fund is losing patience with European politicians. Officials at the Washington-based institution are calling on the EU to present a clear plan for its banking union. Europe's debt and euro crisis, the IMF warns, remains a persistent threat to the global economy.

In a report on global financial stability released on Wednesday, just days before an IMF meeting that will bring together the world's finance ministers in Tokyo, the Washington-based institution has called on European countries to move swiftly to implement a pan-euro zone banking oversight regime and other measures aimed at preventing a recession and restoring market confidence.

"Commitment to a clear roadmap on a banking union and fiscal integration are needed to restore confidence, reverse the capital flight and reintegrate the euro area," said José Viñals, the head of the IMF's monetary and capital markets department. "Despite many important steps already taken by policymakers, this agenda remains critically incomplete, exposing the euro area to a downward spiral of capital flight, break-up fears and economic decline," the IMF said in its report.

Faltering market confidence has led to capital flight from countries on the periphery to the core of the euro zone, the IMF stated. This is leading to higher borrowing costs and a "growing wedge between the economic and financial 'haves' and 'have nots.'"

The IMF warns they also fear a credit crunch in Europe as money flees from banks in the peripheral areas and the debit countries, to perceived safety of Germany, Switzerland, the Nordic countries or the UK. Consequently there is ample money where it is not needed.

Another concern for the IMF is the failure of the European Finance Ministers to develop a plan whereby a single banking authority can audit the banks. At the Finance Ministers meeting in Luxembourg this week, the German Finance Minister said the current plan is "poorly conceived." Lacking German approval, the current sketchy plan will not be approved.

The IMF did not confine their warning to Europe, For the US and Japan they are concerned about the high national debt levels. They are also worried about the forthcoming US "fiscal cliff" where they must avoid "excessive fiscal consolidation."

For the Canadians, the IMF also had some warning. Their economy is going to slow, they predict, and more than the current Bank of Canada GDP estimate of 2.1% in 2012, and 2.3% in 2013. Weakness in the US and European economies, Canada's biggest trading partners, will slow the Canadians.

The EURUSD (FXE, UUP, UDN) traded today as some recent longs made an exit early in the session on weakness. After a solid Monday, and Tuesday's down markets, we continued that trend and came close to the 200 day SMA at 1.2824. Currently we are trading at about 1.2890. Should we remain here for the rest of the session, we would then have the last four trading days with a doji on both the high and the low sessions. This is an unusual set up.

Continuing with the weekly charts this pair (EURUSD) is coiling in a triangle. In this type of a set up, when a trade is made outside the triangle, markets usually have a significant move. We did notice the open interest in the CME euro futures market went up by 6,490 contracts on a down day. This means there are some new shorts entering the market and perhaps, our impression of stop loss selling is wrong.

Getting a solution to the multifaceted European debt problems is difficult, like trying different dances simultaneously with sixteen different partners. Our preference is to sell this pair in the 1.2950 area, and as always manage your money.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.