Currency Markets Jittery, Awaiting European News

by: Ralph Shell

It is always interesting to read stories in the financial press, when they report about market movements in the currency markets. Recently the progress, or lack of, in the European debt negotiations has been credit for most of the moves.

Granted the currency trade is not visible. The interbank trades are usually not reported, and commercial hedging is likewise a hushed trade. This, combined with highly leveraged forex traders whose quick entry and exit from markets add to volatility, can make reporting of currency markets difficult. Reporters may often be left with only their imagination to describe the reasons for a market move.

Ongoing euro negotiations have held the markets hostage this week. Rumors of progress rally the euro, only to be followed by bear news which turns the market around. There is a euro summit planned for the weekend, and, now, another planned for the 23rd. Obviously if they had a solution, there would be fewer meetings.

As we said earlier in the week in an article called "Markets Cautiously Await Europe Developments: Now that the European Financial Stability Facility, otherwise known as the EFSF, has been approved by all 17 countries, and will be increased to €440B, there will be a weekend meeting designed to leverage the fund to a larger number. The Guardian, from unnamed sources, says this fund will balloon to €2T, but this is denied by German officials."

So far efforts to expand the leverage of the EFSF fund have failed. There is a movement to make the EFSF a central bank, which would permit the accumulation of dubious sovereign debt. A banking license would permit purchases far exceeding the €440 fund.

There is another proposal to make the EFSF an insurer of sovereign bonds. It sounds like they have some slick talking Wall Streeters acting as consultants.

Of the €440 EFSF fund, Germany is the guarantor for €211B, and an expansion of the fund could easily put them on the hook for more funds. In Der Spiegel today, "Finance Minister Wolfgang Schäuble's spokesman said, (Germany's obligations)will not rise beyond €211 billion. 'That is it. No more. Period.'"

Even should the Germans compromise, a doubtful conclusion, the current efforts are merely directed at atoning for previous sins. A difference between Northern and Southern Europe is creativity, and the ability to make products the world wants, price often excluded.

When going out for an evening, I sometime drive a car made in Germany. Friends of mine celebrate with a shot of Jagermeister also made in Germany. (My personal preference is some chilled Jamison.) A complain about German cars are too complicated and only the dealer can fix them. But for years there have been no cars from France, Spain, or Italy sold in the U.S.

The point is, Southern Europe, though a great place to visit, is not a big exporter of value added products. This area remains a great attraction for tourist, but as a member of the euro, this area less competitive for the vacationers' monies. What happens at the continued succession of summit meeting will give us some market movement, but we seriously doubt it was give the euro anything but temporarily strength.

Maybe a European version of the U.S. Fed, or the Bank of Japan, or the Bank of England might provide some longer term stability, but this does not seem possible, with the current leadership, and with a crisis that will likely grow.

The euro continues to trade like the market expects some good news. After slipping to 1.3656 early we have come back to trade currently at 1.3770. We continue to prefer the sideline, although selling the euro on a rally above the 1.39 area looks interesting.

Currency Markets Jittery, Awaiting European News
(Click to enlarge)

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