Key News

• Banks and regulators from across Europe have been summoned by the European Commission to discuss regulation of the market for sovereign credit default swaps in the wake of the Greek debt crisis. (Bloomberg)
• China’s hidden borrowing may push government debt to 96 percent of gross domestic product next year.

Quotable

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting.”

                             Jesse Livermore

FX Trading – Greece stabilized? If so, what next for euro? ECB rate cut?
Some analysts have the view that if Greece is stabilized it will prove the euro has passed a major test, and lead to a fresh new rally against the US dollar. Of course we can never say never when it comes to trading/investing, but it seems an unlikely course precisely because of the key element needed by Greece and the other states in fiscal jeopardy-austerity.

Let’s suspend our disbelief for a moment and assume the respective parliaments among the key countries do muster the political courage to pass and implement real reform. Given Europeans love for nanny-state socialism, that will not be easy.

Draconian austerity will most likely lead to much slower economic growth throughout the Eurozone. Interesting that Germany, the European paymaster, is calling for austerity that will likely impact its exports very negatively. Another sour spot for German taxpayers I am sure ... as exports to Eurozone 25 countries have been on the mend likely as a result of much government stimulus money that is due to vanish if real austerity is tried:

German Exports to Eurozone 25 Countries:

And another country, that buys a decent amount of Eurozone bonds, China, won’t be too happy if its exports to the Eurozone take another hit ...

Eurozone Imports from China:

It would seem that slower growth in the Eurozone, in the midst of deleveraging debt, increases the odds the next move by the European Central Bank will be down, instead of up, as unemployment across the zone is high and will likely grow on austerity moves ...

Unemployed Persons Eurozone:

And monetary velocity is likely to fall, multiplying the impact of slow money growth throughout the Eurozone:

Money Supply: M3 Seasonally Adjusted Eurozone:

All those charts to make this point: If growth slows because of austerity and the ECB is forced to cut interest rates (or at least is forced to remain on hold for a very long time), the advantage shifts decisively to the US dollar relative to the euro.

No doubt, we could see a healthy euro bounce if it muddles through this period of major risk. But when the hard grind and economic impact of real reform starts to settle into the market, we think the euro’s most likely path is lower against the dollar. And that eventuality would suit the European states the need major adjustment just fine.