Sarrafx's Blog

It seems that we can no longer label those heavily indebted countries of Southern Europe as being the periphery.

The idea that Greece leaving the Eurozone could cause the disintegration of the single currency means that the tail continues to wag the dog and will do for some time to come.

Europe is at last waking up to the idea that were Greece to leave, then the domino effect could be catastrophic. Keeping Greece in the club and funding its needs seems to have been accepted as policy.

Mrs Merkel added to the feeling that a solution is close by saying yesterday that “If Greece one day can rely once again on its own revenue, without having to borrow, then we’ll have to look at this situation and make an evaluation,” Merkel told Bild am Sonntag in an interview when asked about the prospect of debt forgiveness. It wouldn’t happen before 2014 or 2015, “if everything goes according to plan,” the chancellor said.

It remains to be seen just how constitutionally possible such an action would be and we are nowhere near getting ratification from inside the EU or, just as importantly, those outside agencies that are equally as heavily involved.

Those are very much matters for the future but the markets clearly liked what they have seen and have gone heavily into risk on mode with the Euro trading comfortably above 1.30 and looking very much lined up for an assault on the heavy resistance at 1.3120.

This is a heavy data week with the final NFP of the year to be released on Friday preceded by the PMI reports across both Europe and the U.S.

In line with current optimism, the expectation is for European data to show some improvement from very poor figures released last month and for the U.S. to see a slight pullback. Italy was the first to release and they showed a weaker than expected number.

Economic data has taken a back seat over 2012 as risk sentiment and the debt crisis have driven markets. Therefore it will take something spectacular (and PMI data isn’t considered spectacular) for the sentiment to change.

The JPY continues to be weak and trade comfortably above 80.00 and 106.80. It could be that we are seeing the beginnings of sustained weakness for the Japanese currency and that will be a relief for the new Government following the upcoming elections.

It seems that the Euro will be relatively strong into the New Year. The Greek issue has been deferred yet again but the markets don’t seem to mind. This has had a positive knock-on effect on Spain, their bond yields fell again in November and Italy has managed to avoid the limelight.

It remains to be seen if this serenity can be continued into the harsh reality of European winter following the festive season.

The up move is overdone and ditto in most of the spaces thus one can expect corrective move.

More or less the pair achieved the closer to the max range of 1.6100-1.6130.

Further gains would be tough to negotiate and thus would prefer a dollar rally.

This is despite the fact that the dollar has broken the trend line in weekly and thus posted one of the bear pictures in the recent months.

However most of the pairs are in critical junctures like Euro near the monthly trend line, Sterling near the channel high drawn and also near the weekly trend line.

This ideally suggest corrective rally for the dollar before next move.

Thus a) the influence of Sterling and Sterling alone b) influence of EURGBP c) the broad dollar action in that order is what is one should look into.

The fulcrum has substantially moved from 1.5880 to 1.5960 and the upside focus is towards the 1.6100-50 area. Only break and close below 1.5960 can potentially threaten the up move.

Intra-day shorts recommended as the RR favours within the ongoing dollar bearish bias.

Strategy : Sell here and 40 Stop Loss:- 1.6208 Take Profit:- 1.5980

Where can the West find growth?

The release this morning of GDP data for the EU shows that growth is going to remain elusive for developed economies for some time to come.

A further quarter on quarter fall and a year on year figure of -0.6% shows just how dire things remain. German Factory Orders also released this morning were appreciably better than expected but this merely highlights how bad things are in the rest of economy that is inexorably linked by the single currency.

Now that the immediate issues of the debt crisis have been postponed it remains to be seen what can be done to promote the growth that is the only way that a sustainable recovery can be achieved.

Mrs Merkel has said in a number of speeches recently that growth is the key driver for economic recovery. Of course never having had to stimulate the German economy to create growth she doesn’t actually have any practical experience.

Austerity for the foreseeable future is not going to be a sustainable policy and expansion through public spending is the only way that confidence can be promoted. Confidence will lead to investment, investment to growth and growth to recovery.

Interest rate announcements have now become very boring!

Little can/will change for some time to come. It would be interesting to know when Central Bankers would predict when they see rates actually being increased. It has to be measured in years but I would hope less than five! Maybe three?

In the U.S. things are not a lot better than in Europe from the growth perspective but the economy has a very different dynamic. Stimulation has become a byword and the U.S. Treasury is not really into austerity (the debt mountain is a testament to that). I hope that the current generation are not merely providing case studies for future MBA candidates in how they are handling their respective economies.

Real people with real problems are being affected on both sides of the Atlantic! It is truly tragic to imagine that there are youths in Spain and probably other European countries who will NEVER work! Not through an institutional lethargy but simply due to the lack of opportunity. This is the terrible legacy of this crisis and may be the single issue that creates a sufficient groundswell if not to pull the Eurozone apart then to create sufficient support for programmes that create jobs.

It is clearly the responsibility of every politician in every country to support such programmes. The EU centralized in all the wrong ways and also decentralized in all the wrong ways. If there is commitment to this experiment then it needs total commitment, harmony on taxation a single Central Bank and job creation schemes that stretch from Malaga to Oulu and Bruges to Larnaca.

So, that was 2012!

What did we learn? Well, as far as I am concerned, I learned that gravity doesn’t exist! What is holding the Euro up? I have now idea.

It seems that with Greece having secured a further bailout, all in the garden is rosy. The Euro is trading up above 1.30 (as I write) and making multi month highs against an ailing JPY. There is something of a paradox here. Of the two major safe haven currencies, the JPY is weaker as their economy struggles and further QE is expected while the other the USD is weaker as their economy is starting to improve (if the revised GDP data is to be believed.)

So, that was 2012! What of 2013?

Well one thing is certain the issue of the Fiscal Cliff will be resolved, like the stars of an old romantic movie, the Democrats and Republicans are acting coy but will get together before the final reel!

Europe will continue to kick the can down the street and muddle along without taking decisive action. I saw this morning that Mr Draghi says that the population of the EU can trust him and the ECB. Trust them to do what is the question!

I am still a believer in my tenet that the Euro is not best solution for what ails the Southern countries and help from the North cannot be expected to last forever. Indeed a Bloomberg Survey just released shows that most economists believe that the continuation of the debt crisis will drag Germany back into recession. Without their help as the major contributor to the various bailout funds what will happen?

That is definitely a question for the New Year.

A topic I have mentioned before but feel no shame in mentioning again is that the action taken by the U.S. at the start of the financial crisis (is it coming up to five years ago?) was not maybe a perfect solution but it was decisive and gave America something to build upon. The EU is still bumbling around in the dark and hoping that doing pretty much nothing is a solution in itself.

I have three wishes for 2013, they won’t come to pass in this year but I would like to see some progress; First the collapse of the Euro (naturally). Guys, it’s not working, please wake up.

Second, some progress in the U.K. to leave the EU. They don’t belong and never will. The populace don’t like it. Brits view sovereignty totally differently to mainland Europeans and will cling to every last vestige before they hand anything to Brussels (or Frankfurt/Berlin).

Finally, can we have our market back? Trading that works technically due to fundamental reasons. That is to say, let’s say goodbye to risk on/risk off and welcome back to currencies and commodities that move due to supply and demand created by economic fundamentals.

I have a trade Idea!

Sell Eur with a TP at parity! I am not sure when it will happen but I know it will.

Trust Me!!!!!!!!!

I am Eurosceptic with a capital E!

My views on the Euro were forged as far back as 1992 when the Maastricht treaty was first signed.

I felt like the boy in the children's story of The Kings New Clothes. In the same way that the boy could see that the king was naked, I could see that the single currency was a potential disaster and I was very pleased that my country (U.K.) would not be participating.

I do not consider myself a grand sage or predictor of future events. However the vision of one size fitting all was the most preposterous idea I could think of.

Having studied economics and seen at first hand while trading their currencies how Spain and Italy managed their economies it was clear that they would never be able to manage the fiscal discipline of the German model. Their high inflation, high interest rate economies seem to fit nicely the persona of the people and therefore the image of the country. Equally, the discipline of Germany reflected perfectly the persona of their people and therefore the image of the country.

How this was going to work in one big melting pot was something that has been keenly observed over the past twenty years as it has evolved to where we are today.

Read more - http://www.sarrafx.com/en/view-blog-article/44/The-Big-Picture

Our philosophy is to give our clients all the tools that are necessary to enable them to be successful.

Our management team is experienced in the financial markets having spent, collectively, more than five decades in the business.

Our experience teaches us that not all information is good information and feeling obliged to report readily available data and news to clients is not only wasting their time but is also counterproductive.

Over the past twenty years markets have changed out of all recognition but the dissemination of information has barely changed at all.

With the advent of fax technology every trader could expect to receive numerous missives from his banker/broker each saying roughly the same thing giving fact rather than interpretation.

With the advancement of the web and email together with any number of electronic delivery channels little has changed.

Sarrafx aims to be different. We will never tell you we have an exclusive news item but we will always have exclusive interpretation.

Do not expect to see an email at 8.00 every morning or to see this blog updated at regular intervals.

It is our intention that when you see an updated blog it will have been written to be informative and not to simply keep our name in front of you.

We will provide an economic calendar on our site but we remain well aware that that most information we provide is widely available on the Internet.

We would not expect you to visit our site to see what data is expected to be released today but to see what we believe are the money making opportunities those releases present.

What is not generally available is the incisive interpretation of that data offering our clients money -making opportunities.

The regularity of articles will ebb and flow with the markets. It may be that you will see two or three in a day and nothing for three days.

Basically, I think it is impossible to make money trading FX (or any other market) by using technical analysis alone. No matter what indicators, time frame or system you use it cannot work in isolation.

These markets work on so many levels with so many influences, inputs and indicators that to limit oneself to one seems to me a little naïve.

Read more: http://www.sarrafx.com/en/view-blog-article/46/Why-wear-blinkers?

Is the situation in Europe out of control?

It seems that more and more issues are piling up on the already unsolved problems that have been in existence virtually since the crisis began in 2008!

Greece has apparently met only 22% of its responsibilities to cut spending under the latest bailout and has asked for a two year extension to its obligations.

It is hard to imagine that Greece can survive within the Eurozone given its lack of ability driven by social unrest to meet the agreements it has signed.

Want to Read more? http://www.sarrafx.com/en/view-blog-article/49/Out-of-Control

So it’s now all about Spain!

It still defeats me that a country getting its house in (some kind of) order prior to asking for a bailout is positive for either risk appetite or the currency.

As relief rallies go yesterdays was pretty impressive but does that really now mean that the market has gone away from the technically significant 1.2930 level?

It seems there is always another potential banana skin on the horizon and already today we have seen dismal growth data from France. The French economy was flat in Q2 and grew at 0.3%YoY. German retails sales for August were also worse than expected.

Back to Spain though and later today we see the results of the stress tests that have been performed on their banks. Additional capital requirements of over Eur 100 bio. are already in the market but this will lead Spain closer to a bailout request.

It is ironic that yesterday’s 5^th austerity package drew appreciation from the market which saw Spanish bond yields drop. Prime Minister Rajoy has said that he won’t ask for a bailout unless bond yields “remained too high”.

The Spanish Government will raid for the first time a decade-old pension reserve fund that invests in government debt to pay for an increase in retirement payments.

The Cabinet agreed to use 3 billion euros ($3.9 billion) from the 67 billion-euro reserve fund, Deputy Prime Minister Soraya Saenz de Santamaria told reporters yesterday in Madrid. It raised pensions 1% in the 2013 budget and indicated it would compensate retirees for above-forecast inflation.

“The reserve fund is there to be used,” Budget Minister Cristobal Montoro said. “Politically, it’s very important” to maintain pensioners’ purchasing power.

The pension reserve invests mostly in Spanish government bonds, and accounts for about 10% of the central government’s outstanding debt. The cache that has been built up since 2000 to safeguard pensions from the aging population is being raided as the 25% jobless rate undermines the welfare system’s revenue.

This adds to pressure for Spain to ask for the bailout since it means less support for Spanish debt. It is clear that if the fund is being drawn upon it won’t then be able to invest in future bond issues.

What conclusions can be drawn from Spain’s 5^th austerity package? Read my views here

The President of the Czech Republic, Vaclav Klaus, is in New York for the United Nations General Assembly.

In an interview yesterday he made some very valid points regarding the peripheral countries and those on the outside looking to enter.

He called himself a “euro-realist,” saying he supports European integration while not embracing the shift towards “unification, centralization, harmonization, standardization” of the whole continent, including the single currency.

The term Euro-Realist would be a very good term to apply to those who have the vision to turn this potentially catastrophic situation around.

Realism is sadly lacking but that is the stock in trade of many politicians.

The issues facing Europe do not span a single term in office for any of the leaders so they continue with short term fixes that do not hinder their chances of being re-elected.

The Czech koruna was the world’s best performer against the euro in the decade ended December 2010, advancing 40%. Investor confidence in the Czech economy is reflected in the nation’s 10-year local-currency debt, which yields 2.4%, compared with 4.8% for similar-maturity Polish bonds and 7.2% for Hungary’s.

I simply use that data to illustrate Mr. Klaus’ economic credentials.

He feels Greece is a “victim of the monetary union” and it’s better for them to not to be in the Union. “Leaving would be a victory”. This simply illustrates the flaws in the plan and failure of the whole system. What applies to Greece certainly applies to the rest of the PIIGS.

Looking at those countries with a commitment, however loose, to join the Euro, the view of those outside looking in is very interesting.

Regional apprehension about the euro has grown with Europe’s debt crisis. While euro-zone nations purchase more than half of the exports of eastern European nations, seven of the 10 former communist countries to join the EU since 2004 have yet to adopt the currency.

Poland, which three years ago shelved plans to join in 2013, deems the euro “completely unattractive,” Prime Minister Donald Tusk said in July. Hungary won’t adopt the currency before 2018, Premier Viktor Orban said in March. Bulgaria has indefinitely delayed plans to scrap the Lev, Prime Minister Boyko Borisov told the Wall Street Journal in a Sept. 4 interview.

The Czech Republic has an open ended commitment to join the Euro and Mr. Klaus concluded by saying “We accepted with some reluctance the prepared conditions for our entry into the EU. We were aware of the fact that joining the euro system was one of the conditions. But we are quite happy with the fact that there was no timing.

Perhaps in the year 2074 we can join the European Monetary Union as well,” he said

“No one is pushing us.”

What does this mean for the Euro? The conclusions I have drawn from this are here