The continuation of the perpetual Greek story has dominated news from the eurozone this week. We can look forward to further headlines. Certainly the best interest for the Greeks, it seems, is for the Greek Parliament to satisfy the demands of the Central Bankers and pass an austerity budget that will please the bankers. But will than make the mob demonstrating at the front gate happy?
A solution to the Greek solvency problem is illusive. The Greek Government does not have enough money to meet their obligations. The market will not finance the debt, so the ECB has become the only source of funds. Bankruptcy would be the choice for an individual, but the central bankers are trying to preserve the integrity and future of the euro, and they feel a default would tarnish the currency, as well as it would inflect serious damage to euro banks. A horrible ending is better than a never ending horror, but it will likely take a new group of politicians to end the charade.
It is now evident to markets that Europe has a debt problem. No longer is it possible to contain this at the Greek borders. Yesterday Moody's said they may downgrade 13 Italian Banks because of a cut in Italy's debt ratings. Today trading had to be stopped in Italy's two largest banks, UniCredit SpA, and Intensa Sanpaola SpA, because selling took these issues sharply lower.
The Greek and euro bankers currently occupy center stage, but later this summer attention will be focused on the lack of an increase in the US debt ceiling. The current administration regards the debt ceiling as a political opportunity. You can already see hints how the debate will be framed. The only budget the administration has proposed, calls for an increase in spending and a deficit of trillions over the next ten years. This budget was dead on arrival, rejected by both parties.
Many of the new arrivals in Washington got their jobs, because they promised a reduction in Washington's reckless spending. With negotiations between the US House and the White House going no where, Eric Cantor, house majority leader, and Sen John Kyl, the minority whip left the negotiations. Today this prompted the ultra liberal New York Times to blast the Republicans with an editorial called "Their Temper Tantrum."
Democrats certainly remember their political success when the government was shut down under President Clinton in the nineties. When the Republican controlled house would not agree with Clinton, he shut the government down. The major TV networks and newspapers then accused Speaker Gingrich of being a heartless monster who wanted to deprive children of school lunches, and old people of their medicine. The political points gained by the Dems, with help from the media was substantial.
Treasury Geithner has repeatedly said the US Government will not default on their debt issues. What are the chances, however, when they reach the debt ceiling, the government will stop military pay, maybe food stamps, or disability pay to prove, again with the media's help, what a cruel bunch of bastards are the Republicans.
Perhaps it will not play out in this order, but a debt crises seems imminent in the US. True, this crises will be contrived, but the army of dollar bears will be joyous. The USD bulls best enjoy their moments because latter this summer it may be the the euro bulls turn.
We have noted the COT report has revealed the specs to be large longs in the euro. Yesterday when the euro failed to respond to what seemed like constructive news from Greece, the euro sold off. Volume at the CME futures market was heavy, 399K contracts, over twice the open interest of 177K. The OI was modestly lower, 4.8K contracts. This probably means any further weakness will bring out more long liquidation.
Last week there was a cross over on the daily chart, the 5 day slipping under the 20 the day chart. The MACD is also signaling a move to the downside, but signals are not always accurate. The weekly chart is coiling into a triangle. An upside breakout looks to be around 1.4550, and the down side around 1.40. We will see what next week brings.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.