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“The winds and waves are always on the side of the ablest navigators.”

                           Edward Gibbon

FX Trading – Have we stopped listening to Geithner yet?

The US Treasury Secretary has been in China, tip-toeing around yuan exchange rate reform, Chinese industrial protectionism-type behavior, etc. It was obvious Geithner was not there to point fingers – he’s probably been given a strict script to which he must stick … after seemingly losing his cool on Capitol Hill months ago.

But, ahead of Geithner’s upcoming trip to the UK and Germany, Reuters brought this quip to light:

"I’m completely certain that Europe has the ability to manage this," Geithner said.

So our US Treasury Secretary is completely certain that Europe has the ability to manage this. Just like they had the ability to manage a common currency? Just like they had the ability to manage individual fiscal positions within a monetary union?

Maybe they should ask the Estonians for help managing this. Or Maybe Giethner read this Financial Times editorial this morning, excerpt below:

Reaffirming sovereigns’ responsibility for their sovereign mistakes would not weaken the eurozone’s political cohesion. It would strengthen it, by showing that monetary union is not a covert “transfer union” lacking popular legitimacy.

A new growth and stability pact must also be forged. Unlike the original, it must be enforced. Rule-breakers should have European Union funds withheld, and voting rights on eurozone matters suspended. But credible rules must ensure fiscal probity while recognising that fiscal rectitude is not all that matters. Deficits are more sustainable when debt is lower or growth faster, and at the bottom of a cycle. Crucially, growth is a precondition for stability, not something to be traded off against it. Putting countries on the rack of debt deflation will not stabilise their economies, only destabilise their politics.

So surplus states must bring something to the table. Deficit spending can crank a recovery into gear. Fiscal retrenchment must come with measures to expand private demand. In future Europe’s growth rate must be raised through productivity gains. This is something neither fiscal nor monetary policy can do: only the hard structural reforms that Europe has so long ducked will succeed. Despite the angst over the euro, the greatest prize for Europe remains not the stability of its money but the dynamism of its real economy.

As I look over the charts today I see EURUSD is down about 150 pips … again. And today most currencies are lower and risk aversion is thick.

It seems investors must have grown tired of listening to Geithner.

Probably as little as four months ago the US dollar would experience pretty steep declines whenever Mr. G opened his mouth. Today the US dollar’s declines are few and far between. We expect it to stay that we for a while … because we’re not even close to completely certain that Europe has the ability to manage this. In fact, we’re a lot closer to completely certain that they don’t.

I may have mentioned this the next day, but about a month ago or so Jack was telling me he was reading the latest Elliot Wave long-term forecast. The main idea: we were very near the start of major leg down; not a correction, but the next big move of a larger bear market trend that would take out last year’s low.

Let’s turn to the S&P 500 futures (daily) for a look at what’s happened since:

Now, I can’t remember the exact date, but it’s safe to say the call came right around that red circle, a.k.a. the top.

Any technician’s mom could recognize that we’re now testing big-time support on this chart. That means we could see the selling take a pause sometime soon; or not. The thing is … investor’s nerves probably won’t be granted that same luxury because the global macro forces driving this move lower aren’t going to be subsiding anytime soon.

And if this support level does represent a resting point for global asset markets, what might be the trigger for a fresh push lower when it comes?

Well, it could be a set-back to the economic indicators that have so far been rather decent. Because if this European-bred risk aversion eats away at investor and consumer sentiment, and thus the recovery in key economic indicators (lending, jobs, consumption, etc.), then there’s going to be very little to hold up these markets.

Place your bets. US dollars continue to look good at that point. Escape to America, anyone?