Forex Blog

All eyes continue to focus on Europe and the rising yield situation as it unfolds and pushes the cost to finance debt to record levels.  Italy and Spain have seen record yields as of late, and now the attention is starting to turn toward France, the EU’s second largest economy.  Spain also downgraded their GDP outlook.

This has prompted a bit of a battle between France and Germany with the former wanting a much greater participation from the ECB in this whole debt debacle.  The idea is that the ECB would become the “buyer of last resort” which theoretically should stabilize the market and allow yields to come down.  This action would be similar to the “bazooka” that the US Fed claimed to be ready to use, essentially scaring off the potential bond vigilantes.

However the EU situation is different and because they have let it drag on for so long the credibility of such an action would be in question.   And this is where the ECB in general runs into problems.  Even if they said that they would be the buyer of last resort, the market would most assuredly test that resolve and it is likely that a worse situation would unfold even if they did follow through with it.  To say that this is not a good situation is an understatement.

Italy and Greece though look prepared to institute the austerity measures they must undertake, as Papademus in Greece has received initial support.  In Italy, PM Monti has also declared himself the Finance Minister, thereby eliminating a potential conflict.  So its Monti or bust!

On the data front, the most important numbers have come from the UK.  Consumer confidence figures came in way lower than expected with a reading of 36 vs. and expectation of 43 which itself was lower than last month’s 46.  But yet the retail sales figures came in gangbusters showing a gain of .9% vs. an expectation of a decline of .2%. 

Perhaps this disconnect can be explained by the fears that are instilled by the government despite the decent economic data that is released.  The government keeps harping on how bad the economy is to justify their easy money position and explain 5% inflation, but I think the economic data tells a different story.   Right now, the UK is doing exactly what should be done around the globe by reducing government spending.  The inevitable dip in GDP due to that action should be welcomed and not feared.  Are you listening, Bernanke?

Here in the US, the data was largely positive with initial jobless claims coming in at 388K vs. the expected 395K.  Building permits also rose 10.9% vs. an expected 2.4% with the expected 603K exceeded by the reported 653K.  Housing starts also came in better than expected, with 628K reported vs. the 610 K expected.  Later this morning the Philly Fed Index will be released and there will be some Fedspeak from one of the Fed minions.

So the number here in the US while not great are improving, and it will be interesting to see if Bernanke can justify further Fed monetary easing with the improving data.  Obviously the risk in the EU could cause a liquidity dry-up so he may have to resort to that line of reasoning.

Nevertheless the markets are in slight risk-aversion mode, having improved some since the data releases earlier this morning.  Yesterday’s move higher in oil to $103 is being explained as the un-wind of crack-spread trades, although I find the timing of the move curious with yesterday’s release of CPI data.

With oil prices above $100 it will be much harder for Bernanke to mask the true inflation we see in the economy unless housing prices continue to tank further.  My general feeling is that the only thing holding back the markets right now is the Euro debt crisis and we would be seeing some massive inflation (in everything but housing) if they truly solved the problem.

But for now nothing appears to be close to light at the end of the tunnel so I prefer to keep my trades to the short-term and take advantage of the volatility, rather than trying to avoid it.