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Euro Drifts Lower Awaiting News/Developments

The Euro continues its trek to the downside with few interruptions.  It appeared yesterday that the contemporary Greek tragedy, the debt crises, was being solved and would move off  the front business page was incorrect.  Aware that the Chinese had loaned the US a trillion or more, the Greeks attempted to peddle some of their debt to Beijing.  Details remain sketchy but terms, which may have included an equity position in a large Greek commercial bank, were unacceptable to the Greeks. 

The EUR/USD drifted to a new low of 1.4020 this morning and has only moved slightly from the low.  A market that quietly drifts into a new low with little fanfare of follow through is peculiar.  A spike low under the 1.40 accompanied by stop loses and market pundits loudly proclaiming a much lower targeted low, would be a better set up for a turn around.

Reports on the economic calendar were sparse today.   The Commerce Department did release the December report of home sales which reported a second straight monthly sales decline.  The severity of the sell off in home prices since the high of 2006/07 should be able to attract a bevy of new buyers, but that has not been the case.  Buyers, when confronted with an increasing supply of foreclosures and short sales, are not aggressive.

The FOMC will release notes and observations at 2:15 today, and the devil will be in the details of the fine print.  The market expects the easy money policy to continue well into the future.  A surprise would be any increase in rates prior to November.  Earlier this week a European Central Banker expressed concern about the size of government deficits, and the massive amount they need to borrow.  In the US the OMB estimated the budget shortage will be in the $1.5T neighborhood and the roll over of existing debt could take the total US needs over $2T. 

The Fed's program to buy debt, and ultimately increase the money supply is supposed to end by April 1.  Considering governments massive needs to borrow, both here and in Europe to finance current expenditures, the Fed may be confronted with a dilemma.  Halt the expansion of the money supply and the rates will increase.  A 5% ten year note  would kill the embryonic real estate recovery.  But an expansion of the money supply, quantitative is easing the contemporary description,  might keep rates under control but how would the dollar fare with this program.

With the Euro already a wreck, would a Fed surprise or perhaps a failure to confirm Bernanke tomorrow give us a little excitement?  We will be watching closely.





Disclosure: no equity positions