Rebel Traders – Analysis Without The Hype

Now here is something unexpected tonight.

The Euro dropped suddenly this evening on a rumor that German Chancellor Merkel may resign. Speculation is that due to Merkel’s loss of coalition support she may step down.

This is all the information I have at this time. This news appeared on my wire service tonight and there is no other information at this time. Moments after the story hit the wires the Euro dropped and in turn the US Dollar moved up.

The chart shown here is a 5 minute chart of the EUR/USD at the time the story began to circulate on the wires.

The S&P 500 futures also moved down slightly as the US Dollar futures moved up.

UPDATE: A spokesperson said the Merkel resignation talk is “without merit”

As has been stated numerous times on this site everything comes down to the currency markets. The US stock market is neither trading on current nor future fundamentals. It is simply moving in reaction to events in the currency markets.This has been the case for at least 3 months now. First as a safety trade, and now as a carry trade that has gotten out of control.

At the beginning and throughout much of the financial crisis the US dollar was a short term ’safety trade’, or in other words a risk aversion parking spot. But, as the value of the US dollar continued to deteriorate it became a carry trade (borrow US dollars cheaply to engage higher risk/cost transactions) much like the Japanese Yen did in 2007 and early 2008.

Carry trades never end well, and with the worlds global currency now being nothing more than a vehicle to borrow cheaply it will (not if) lead to a disastrous outcome if the US Government does not take an active role in stabilizing the currency. But it may be too late, for even if the Fed (or another nation) intervenes in currency valuations it could force a massive liquidation of the carry trade that will force the selling of higher risk assets (stocks as one example) for any rise in the dollar creates a higher pay back of the original borrow (carry trade). This is why the dollar and the equities market have been so tightly intertwined.

Should the US dollar get into a run away downward spiral it will cause a number of situations to unfold. One situation is that it will prompt other nations to raise hell over the currency devaluation and in turn raise substantially the chances of purposeful foreign currency devaluation on the part of other nations in an attempt to stabilize the FX markets. You see, there is a price to pay when your currency is the worlds reserve currency. The second situation will be a currency dislocation event, that is when commodities, bond markets, and even stocks (as stocks are the highest risk asset among investment classes) will suffer as there is a global shift in currency valuations that will propagate globally. Suddenly valuations of stocks becomes increasingly mute as all references becomes tilted.

Right now we are at a cross roads with respect to the global financial situation. As I type this the Japanese Yen / US dollar cross is literally on the line of either staying above a significant support level, or breaking below it which could possibly be the beginnings of a currency market ‘event’. Wondering what will happen with the US stock market? Forget about valuations, forget about better than expected or worse than expected at the moment. All of that is for the most part meaningless at this juncture (and has been in recent months). Right now one only has to turn to the FX markets as it is there that traders, hedge funds, and sovereign wealth funds are watching.

The US stock market is currently over valued on even a basic fundamental basis and over bought on a technical basis. Should the US dollar rise equities will be even further over valued as the reference currency plays havoc on the pricing of equities. Not to mention the rapid selling of higher risk assets to unwind the carry trade.

Should the US dollar go down a dark rabbit hole it will raise the potential significantly of a global currency market storm. That is the risk we face with the dollar being the reserve currency and why so many nations are still considering abandoning the dollar as the reserve.

The risk of holding assets in the equities (stock) market is extremely high. Go ahead and chase those stocks higher and higher if you wish. But don’t say no one warned you of what might happen if the currency market dislocates, or the US dollar carry trade is forced to unwind in a panic.

I remain bearish on US equities. There is more to understanding the market than just the price of Google stock. In general, the older one is the more they see danger in this market for it is us older folk who have witnessed more. As Art Cashin (one of those old timers on Wall Street) stated today there is so much air supporting this market that any upset we could see a fast 1,000 point drop ( Dow Industrial) very quickly.

The entire financial crisis is still playing out. Little has changed, only the names have changed. US stock market prices are indeed floating on air and have been for a considerable amount of time. It remains my opinion that equities should be sold and a safer position be maintained. If there is a severe currency market dislocation there will be no safe investment other than to be out of the market. Once again this is my view and I will continue to trade my own account accordingly. You on the other hand must decide for yourself if you feel safe with your money tied up in the equities market that is being elevated on a devaluing currency, which so happens to also be a global carry trade. Cross your fingers that a massive currency dislocation event does not happen.

Trade at your own will,  but be warned there is danger all around.

Even FOMC member Fisher said on November 16 -

“Carry trade usually ends in tears”

Sphere: Related Content

The November FOMC minutes are out. That’s right folks, it is time for another helping of gibberish that is just chock full of boring (and in some cases undecipherable) language, and more humorous projections.

Recall that the FOMC minutes in 2007 used such terms as moderate growth to continue, decrease in construction mostly due to seasonal contractions, and little risk to the broader economy. Well they sure got just about everything wrong, and still do today.

If you are so inclined to humor yourself  I offer you the latest FOMC minutes for your reading pleasure.

One of my favorite lines from the FOMC Minutes:

‘Saw decline in US Dollar as orderly’

Thank goodness it has been orderly, I was getting very concerned there (sarcasm intended).

Does this look orderly? I think not.

US Dollar Chart

FOMC Minutes:

FOMC Minutes November 2009

Good morning to all…

Developments in the overnight and early morning hours have us on a ‘reversal watch’

First is the US dollar futures index (/DX), in the early morning hours the dollar hit the lower wedge line and that is a significant level for support.

5 minute chart of the dollar index:

Dollar Futures - 5 minute Scale

Next we have the 10 year futures (/ZN) which have also been moving up rather strongly in the early hours and the formation on the 5 minute chart thus far has a bullish flag on the 5 minute scale.

10 Year Futures (/ZN) - 5 Minute Scale

Last is the VIX which has been rising since the open. All signs of something very big happening soon. Be on your toes today!

This is a reversal watch alert, not a warning just yet. But be alert for some very severe moves today.

(h/t Butch)

Is the US Dollar on Prozac now?

According to London’s Independent News meetings have already been taking place on just how some countries will break ties with the once old faithful U.S. dollar.

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years. [...]

[...] This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region’s conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.ing P

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. “One of the legacies of this crisis may be a recognition of changed economic power relations,” he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China’s extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America’s power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states. [...] Source: UK Independent

It appears clear that with each passing day there is less and less confidence in the American economy and/or the United States currency.

The Dollar Is Diving…

When money leaves the equity markets the active hedge funds, investors, and other large money movers on Wall Street will seek out the ’safety trade’. Traditionally the safety trade has been to move money over to the treasury market. When the stock market went down the bond market (price) would go up.

Another ’safety trade’ of late has to been move into the US dollar. However now we find ourselves entering into a very different phase of the economic disaster that the United States is still in.

The US dollar is now beginning to drop in price against other world currencies. And at the same time money is being pulled from the treasury markets which is now sending yields up. These two events combined are creating significant headwinds to economic recovery in the United States. Ben Bernanke needs to keep yields low in order to keep what is left of the credit markets moving. Tim Geithner wants the US dollar to be healthy in order to keep foreign holders of our debt happy and to have them purchase even more treasury notes.

But, should the bond market continue to drop in price sending yields (and interest rates) upwards, the US dollar dropping, and the equity market still hanging by a very thin thread and about to roll back over based on chart technicals then the rug will be pulled from out Ben Bernanke and Tim Geithner.

Yesterday we witnessed a situation not often seen. Treasury prices were dropping, the US dollar was dropping, and the money being pulled was not going into the equity market as money was being pulled from stock as well. Yesterday may very well have been a ‘vote of no confidence’ in the economy of the United States. And with the debt load (and still growing) from all the bailouts putting at risk the credit rating of the United States I too would have no confidence in the US economy being healthy for a very long time.

Ben Bernanke and Tim Geithner may very soon discover what all of the bailouts have ‘really’ cost. The problem is that Ben Bernanke is at the last page of his play book.

(click image for full size)

USD/JPY

Again we find ourselves hearing chatter from the other side of the globe that China wants ‘other’ currencies.

Brazil and China will work towards using their own currencies in trade transactions rather than the US dollar, according to Brazil’s central bank and aides to Luiz Inácio Lula da Silva, Brazil’s president.

The move follows recent Chinese challenges to the status of the dollar as the world’s leading international currency.

Mr Lula da Silva, who is visiting Beijing this week, and Hu Jintao, China’s president, first discussed the idea of replacing the dollar with the renminbi and the real as trade currencies when they met at the G20 summit in London last month.

An official at Brazil’s central bank stressed that talks were at an early stage. He also said that what was under discussion was not a currency swap of the kind China recently agreed with Argentina and which the US had agreed with several countries, including Brazil.[...]

Mr Zhou recently proposed replacing the US dollar as the world’s leading currency with a new international reserve currency, possibly in the form of special drawing rights (SDRs), a unit of account used by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Mr Zhou said the goal would be to create a reserve currency “that is disconnected from individual nations”.[...]

[...]In what was interpreted as a sign of Chinese concern about the future of the dollar, the governor of China’s central bank proposed in March that the US dollar be replaced as the world’s de-facto reserve currency.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency ”that is disconnected from individual nations” and modelled on the International Monetary Fund’s special drawing rights, or SDRs.

Economists have argued that while the SDR plan is unfeasible now, bilateral deals between Beijing and its trading partners could act as pieces in a jigsaw designed to promote wider international use of the ­renminbi.

Any move to make the renminbi more acceptable for international trade, or to help establish it as a regional reserve currency in Asia, could enhance China’s political clout around the world.

Source: Financial Times

China and other emerging nations back Russia’s call for a discussion on how to replace the dollar as the world’s primary reserve currency, a senior Russian government source said on Thursday. Reported by Reuters.

Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.

Calls for a rethink of the dollar’s status as world’s sole benchmark currency come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.

Russia met representatives of China, India and Brazil ahead of the G20 finance ministers meeting last week, as the big emerging powers seek to up their influence on decision making globally. Their first ever joint communique did not mention a new currency but the source said the issue was discussed.

[...]A U.N. panel of experts is also looking at using expanded SDRs, originally created by the International Monetary Fund in 1969, but now used mainly as an accounting unit within similar organizations as a new reserve currency instead of the dollar.[...]

Just as I described in my summary video last evening. The Federal Reserve and Ben Bernanke only want to address short term needs and ignoring the long term implications. If Ben Bernanke keeps up his printing presses and the Treasury keeps up bailout after bailout then the U.S. dollar will be the laughing stock of the world.