Key News

• The euro's inevitable failure will be horrendous for all of us (Telegraph)
• Cameron Betting on Prosperity From Austerity; Obama Delays World leaders from the U.K.’s David Cameron to Naoto Kan of Japan are betting they can deliver fiscal austerity without derailing economic prosperity. History suggests they may be right. (Bloomberg)
• Touch of Deflation Is Way to Price Stability (Bloomberg)
• Deflation fears are overdone (Pragmatic Capitalism/Credit Suisse)

USD-CNY Daily:

Quotable

“Those who live by the sea can hardly form a single thought of which the sea would not be part.”

                          Hermann Broch

FX Trading – Stressed Out

We could refer to our once-upon-a-time Currency Currents that criticized the stress tests administered to US banks, but really we wouldn’t be saying much more than: ‘they were a phony, propaganda-laden strategy that aimed to deceive investors of the obvious risks that remained with US banks.’

Despite much recognition from news sources of the problems, limitations, and shortcomings of the stress tests, they achieved what their designers had hoped: relative calm in the markets. Even though we were failing to truly test these banks and fairly evaluate them, we could say we did enough.

Big banks were “bailed” out. They’ve since repaid TARP money so they’re not inconvenienced by the executive pay curb. Though the pace at which banks are being shuttered by the FDIC or other means has doubled this year from last year – 80+ banks in 2010 vs. 40 banks in 2009 at this point into the year.

Sure the banks should be forced to close their doors if their risk and irresponsible lending and such has become too onerous to bear. But it’s very much the smaller, regional-type banks that are folding; the big ones (you know them as TBTF) aren’t facing the same fate even though they very much ruled the irresponsible-lending, risk-indulging, derivative-packaging free-for-all that we’ve become so familiar with as the cause of financial chaos.

Now we have the stress tests in Europe, and the results weren’t supposed to be released beyond the aggregate “scores” of European banks in general. But then Spain went ahead and said they’d be releasing results of individual banks, despite the fact that France and Germany didn’t exactly want that to happen.

There’s no doubt that, if any scrutiny beyond the US approach is put into these tests and the reporting of results, some countries will be exposed as still being much too exposed to the debt of problematic European economies.

And then, if the results are not managed well by the multi-headed authority in Europe, then it could very much spark a new onslaught that beats down marks by reigniting risk aversion. Of course, this is what I expected before the release of US stress tests, and that never really materialized as anticipated.

But, as the topic rears its head, the euro is coming off a very much technical, very much overdue bounce. Though yesterday put up a big obstacle to any further rise:

EURUSD Daily

Circled in red is yesterday’s bar which is made up of a higher open, a higher high, and a much lower close – a key day reversal in the near-term, if you will. And now that today the euro is already lower serves as a bit of confirmation that the bears may be back in town.

A shot at $1.20 in the short-term seems likely.