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The European Sovereign Debt Crisis Started The Age Of Competitive Currency Devaluation

|Includes: DBB, EUFN, EWG, EWJ, EWP, EWQ, FXA, FXE, FXF, iShares China Large-Cap ETF (FXI), FXS, FXY, GLD, INP, JSC, SLV, USO, UUP

The European Sovereign Debt crisis has depreciated the Euro, FXE,  This has had an effect in China and Japan as UBS’ Andy Lees writes:

Japan’s May trade figures showed a slowdown in exports for the 3rd consecutive month, down 1.2% m/m. “Exports grew at a slower than expected pace apparently due to the effects of China’s tightening” of banks reserve requirements according to the Norinchukin Research Institute in Tokyo, which also expects the weaker euro to impact because of the resulting loss of Chinese competitiveness; “Europe’s debt crisis is also expected to impact China’s exports to Europe in the coming months as the euro’s drop hurts Chinese firms competitiveness. This in turn is likely to prevent Japan’s exports from recovering fully”. What it seems to be saying is that the model of outsourcing to China and then onward export has lost its competitive edge against Europe given the euro fall. This follows the Herald Tribune report earlier in the week, quoting BIS data, suggesting that Chinese competitiveness has fallen to its lowest level since 1994. As far as direct exports to Europe go, they rose 17.4% y/y (+2.4% m/m) due to demand for auto parts, electronic parts from Germany and other capital goods such as chemicals and metal products registering double-digit gains.

In a sense, Germany, EWG, has gained from the Euro’s fall  with some “increased demand for Japanese parts and materials” which it uses in remanufacturing and export. Germany is an export country; the lower Euro has helped its exports remain strong.

Lees quotes Itochu Corporation as saying: How long does it take before the Chinese takes action to lower the value of its currency, CYB,  to recapture lost trade? This quote raises a most interesting question; as any fall in its currency will trigger Timothy Geither to give the nod to Senator Schumer to pass protectionist legislation with sanctions and embargoes, which of course would result in an all out disastrous trade war.

On April 26, 2010, the currency traders went long the yen and short the global currencies as is seen in this MSN Finance chart of FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, FXF, BZF, XRU, FXY causing the US Dollar to rise; as can be seen in this chart from April 26, 2010 to June 7, 2010 with the

Euro, FXE,

British Pound Sterling, FXB, 

Swiss Franc, FXF

Swedish Krona, FXS

and the Australian Dollar, FXA being sold off the most; click on chart to enlarge.

Then on June 7th, a stock rally commenced, on the announcement of the EFSF, and lasted until June 21, 2010.  Spanish shares, EWP, and German shares, EWG, rose as is seen in the chart of EWG, EWP, EWJ and JSC.  Notice from the chart how a rising Yen, FXY, has benefited the smaller Japanese companies, JSC, more than the larger ones, EWJ. 

Then on June 21, 2010, the bear market of April 26, 2010 recommenced; and the currency traders went long the British Pound Sterling, FXB, on the Cameron austerity plan, and long the Swiss Franc, FXF as the Swiss Central Banks stopped intervening and stopped buying its currency. The Canadian Dollar, FXC, has been sold off as seen in this chart of trading from 6-21-2010 to 6-26-2010; the former two up 1.5 and the latter one, down 1.4% for the week; with the Euro, FXE, breaking even; and the Yen, FXY, rising 1.7%. Chart of FXE, FXC, FXF, FXB, FXY click on chart to enlarge.

The June 21, 2010 through June 26, bear market recommencement can be seen in the chart of JSC, EWJ, EWL, EWU, EWC and EWP with Spain falling the most as its banks are terrifically impared by the European Sovereign Debt Crisis.



TraderMark relates that David Cameron is calling for austerity measures in the UK in part to assure that the nation will not come under any fiscal federalism from the EU and to help preserve its AAA currency rating for the British Pound Sterling, FXB, and thus the value of its sovereign debt, and the liquidity of its financial institutions.

Interest in the Chinese Currency, CYB, over the last three weeks has strengthened base metals as seen in this chart of the base metals, DBB, and China, FXI


This week, Base Metals, DBB,  and oil, USO, strengthened with Gold, GLD, and Silver, SLV, maintaining; chart of GLD, SLV, USO and DBB; click on chart to enlarge. provides the chart of West Texas Intermediate Crude, $WTIC, having a strong Friday trade, taking it up and out of a death cross. Oil is very much as a cross roads. It’s decision time for the currency traders and commodity traders; either it is going up or it is going down.  Speculation of currency traders and a likely military strike on Iran to deter its nuclear ambitions may keep oil, USO, high.  But, ”We are now walking on deflationary quicksand,” said Albert Edwards from Societe Generale; this statement is applicable to oil, base metals, currencies, stocks, corporate debt and sovereign debt alike; that is everything except for the hard assets gold, GLD, and silver, SLV. The of base metals, DBB, shows a death cross, that is deflationary quicksand.  

It is unlikely that the US Dollar, $USD, will move above its previous high, as its chart shows a parabolic turn lower, and demand for US Treasury Debt, TLT, and IEF, will likely be topping out, on concerns of the extremely high US Federal deficit; and as such, investment demand for gold, GLD, and silver, SLV, will remain high.  

The chart of distressed debt mutual fund FAGIX, compared to TLT, IEF, and AGG, suggests a market top is forming in debt of all types.

Soon, even the Rupe, INR, will fall, as will investor enthusiasm for the India shares, INP. Then INDZ, which is 200% inverse of the India shares, will join TZA, which is 300% inverse of the Russell 2000, in going higher. Institutional investors should be entering shorts in INDZ at the current time, as the chart of INP relative to INR is maxed out – stocks have risen about as high as they can on the Rupe which is a relatively stable currency.   When India, INP, is compared to Brazil, EWZ, and the emerging markets, EEM, the chart shows that India is truly is over-valued; chart of  INP, EWZ, and EEM

One can use this Finviz Screener of FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, FXF, CYB, BZF, XRU, FXB, FXY to view the individual currency charts.

Up until the June 7th to June 21, 2010 rally, the European Financial shares, EUFN, stimulated by the European Sovereign debt crisis, had been leading the way down,  chart reveals. Now the European financials have turned lower again falling 3% this week. 

Natasha Brereton in Wall Street Journal article Data Show Big Exposure for Banks in Euro Zone reports that French and German banks continued to hold the greatest exposure to euro-zone countries facing market pressures at the end of last year, underscoring their interest in restoring investor confidence in the region. Data released Sunday by the Bank for International Settlements showed that banks based in the 16 countries that use the euro accounted for $1.58 trillion, or 62%, of all internationally active banks’ exposures to residents of Greece, Ireland, Portugal and Spain. That included $727 billion of exposure to Spain, $402 billion to Ireland, $244 billion to Portugal and $206 billion to Greece, with about half of the Greek.

Bloomberg in article  Greek Banks Borrow $110 Billion Through ECB Repos, reports on June 23, 2010 that Greece’s banks have borrowed about 89.4 billion euros ($110 billion) in so-called repurchase agreements with the European Central Bank, according to Moody’s Investors Service. Greek banks turned to the ECB for cash after the global financial crisis that peaked in 2008 and this year’s sovereign fiscal debacle curbed their access to wholesale funding and bond markets. The nation’s banks have also been hurt by losing about 7 percent of their deposits, totalling an estimated 21 billion euros, Moody’s said. “Changes to the funding profile of Greek banks have widened maturity mismatches and depleted” their “market- funding franchise,” Cyprus-based Moody’s analysts Constantinos Kypreas and Mardig Haladjian wrote in the report.  Deposits dropped off due to a combination of customers’ “tax considerations,” their investing in Greek government bonds and a corporate tax levied in January, the analysts wrote. Clients also siphoned funds into Greek banks’ foreign units, they wrote. The outflows, while slowing, “remain an issue, given the fragility of depositor sentiment,” according to the report. Greece’s banks are building up “pools of instruments eligible for refinancing at the ECB” via repurchase agreements, Moody’s said. Under these agreements, money is lent against collateral, which the borrower promises to buy back at a given time. The New York-based rating company’s figures are as of May 10. “The high reliance on ECB funding is neither desirable nor sustainable long-term.”
Clearly a run on banks is underway in Greece, and Greece’s borrowing through repo agreements has stimulate investment in Greece credit default swaps which also stimulates a rise European sovereign debt default swaps as well as bank default swaps as well. The use of the repo facility monetizes Greek sovereign debt, causing its interest rate to rise and its value to fall. The use of the repo facility unifies European countries into a  eurozone debt union, as well as creates a colossal and monolithic bad bank at the ECB.  The normal market place for funding of banks in Greece, is frozen; and therefore banks have either stopped lending  or drastically curtailed lending. Greece’s central bank has been replaced by the ECB. Mr Trichet is now Greece’s bank manager who is in charge of Greece’s money supply.
Tyler Durden of Zero Hedge writes that Greek CDS are now back at fresh all time highs as the market seems set on not only testing the EU’s rescue resolve, but determined to get a fresh new bailout plan entirely. At last check CDS was just shy of 1,000 bps. The immediate catalyst is a Fitch report that says Greece risk has gone up and that the country will need further consolidation in 2011 and 2012. The broader catalyst is that the entire Greek credit market is completely dead (noi cash liquidity) and momentum trading has now arrived in CDS, which is the only place left to express a bearish stance on Greece.
Greece has lost its monetary seigniorage and is totally dependent upon what the media calls bilateral loans. But these are not loans, they are seigniorage grants from other eurozone nations and the IMF, as there is no way that Greece can go into the sovereign debt market place to obtain money by selling bonds. Greece is currently and will forever more be dependent upon European seigniorage grants to operate its government and make payments to the disabled and retired — that is until either it declares insolvency, for which there is no chance, as the action would collapse banks through out Europe, or until the Euro ceases to be a currency, which is the only outcome in today’s deflationary environment.    

The chart of EWG,  JSC, EWJ, EWG, EWU, EWL, EWP, and EWQ, shows the bear market returning the week of June 21, 2010 to June 26, 2010 and the 8% fall on Spain, EWP and France, EWQ, shares due to the exposure to sovereign debt crisis debt and banking ill-liquidity.

Gold, GLD, and perhaps silver, SLV, is the only currency which will survive competitive currency devaluation; and the only investment that will survive debt deflation. 

Debt Deflation has wiped out an entire municipality, the City of Maywood decided to self liquidate. Hector Becerra of the Los Angeles Times reports on June 23, 2010:  “Maywood, a small working-class community south of downtown Los Angeles, plans to lay off virtually all its employees, disband its Police Department and turn over its entire municipal operations to a neighbor — an action that appears to be without precedent among California cities.  Several cities in the state have said that they are close to bankruptcy because of the sharp drop in sales and property tax revenues.”

All currencies, except gold, and possibly silver, will tumble progressively lower into the pit of fiat abandon, until each is totally mutually destroyed.

Disclosure: I am invested in gold coins