Wednesday, September 29, 2010

Brown Dwarf or Euro Supernova

With the USD as the bookie's second favourite, behind Zimbabwe, in the Great Currency Devaluation Race and the Euro as the 1000/1 three-legged outsider, the world has gone into pre-QE DGDF overdrive. But the dirty tricks games of double bluff are alive and well.

China have just thrown in one of their "CHINA C.BANK SAYS WILL INCREASE YUAN'S FLEXIBILITY" headlines which, to be honest, are as worthless as "the cheque's in the post " statements. But it's pretty symptomatic of the phoney war we are seeing appear all over the place, where stated policy is so obviously at odds with self-interest. In Europe, austerity packages are launched and lorded for the benefit of the shareholders, the creditors, bond holders and the ratings agencies with the country involved never really wanting to enforce them. The UK is the same with cuts of 25% in public spending stated which, if ever delivered in one hit, would kill growth if there is no growth elsewhere to compensate. It’s a matter of hoping the cavalry arrive before implementation has to occur. Zapatero has even gone to the extreme of shouting at the enemy that the cavalry HAS arrived (funding crisis is over) in a hope to scare them off and he seriously jumped the gun in August suggesting reinstating infrastructure spends.

Today sees Spain's general strike kick off and we have had the normal stream of negative Irish newsflow with Anglo Irish, but the market is still in denial of anything EUR/USD negative, with that US QE argument driving everything. US print money, USD goes down (EUR/USD up), the rest of the world buy USD vs their own currencies and then rebalance those USDs into Euros and so there is more EUR/USD up. And of course Gold. We all know that’s been the mechanism for China, but with so many others now joining the fray it's making us reconsider our "Euro woes means Euro blows" policy and PERHAPS we could see the first example of a currency ending in a supernova.

Normally when somewhere starts to die its value gets sold off and it dies in a whimper, the brown dwarf outcome. But the Supernova outcome would involve this process of the Euro being the final resting place for everyone else's QE going critical, which leads to Europe blowing apart through an explosion of currency STRENGTH despite some blindingly obvious internal problems. Ireland, for example, currently have the double whammy of seeing their cost of borrowing soar AND their currency soar. If the Euro really takes off, instead of the argument being over how long Germany will tolerate the Periphery being part of the same group, you would see the Periphery clamouring to get out of their own accord. "You want to leave? Well, if you insist..."

But elsewhere there is a spark of good news re a unified Europe - Germany's involvement in the First World War officially ends this Sunday.

One last comment. Could someone please inform the BBC that the recent Labour Party leadership contest does NOT warrant Royal Wedding style coverage and that whatever Red Ed decides on spending cut policy is really rather immaterial AS THEY ARE IN OPPOSITION NOT GOVERNMENT!


Charles Butler said...

The strike's been a dud, Polemic, except maybe Madrid buses. Barajas was overshooting the minimum flights agreed with the unions by mid-morning - obviously not enough strikers to be everywhere at once. The whole charade is a failed attempt to be relevant on the part of the unions (hint: they're not and everybody knows it), and they won't be back for more.

It'll be way more interesting to see the reaction when Moody's comes up with their decision on Spain. They've waited long enough, btw, to find out that the fiscal deficit will be halved by year end.

ismr said...

It may not be Euro supernova alone. It will trigger many others.

FX said...

TMM, who wants to bet on jockeys when you can trade QE with the best of them.

1. Euroland decoupled = WTF!

2. QE implemented = April digestive period before fire at will.

3. USA macro-growth slowdown = QE anticapation.

4. QE lite = Aug digestive period


Just not how our latest digestive period is LOWER then the previous one.

ismr said...

Dollar fibo:
A: 88.708 - 80.085 = 8.723.
If C = 83.559 - (A * 0.618) = 78.16 , then 5 should be completed now.

FX said...

ismr,I love the fibo but, I'm more interested in the digestive period, carpark-backboard-room meetings?