In a rational world, the euro should continue falling

Outlook:

We have a lot of grievances today, and that’s after getting annoyed at Jack Welch defending his ignorant accusations of the BLS cooking the books (WSJ). His knowledge of statistics and statistical methodology is pitifully weak for a guy of that stature. Maybe his accusations are colored by guilty knowledge of what he used to do managing earnings expectations and earnings at GE, which got a lot of derisory press attention in the 1990’s.

Most of our grievances pertain to the press publishing reports that the IMF findings are not affecting the FX market (WSJ) when clearly, they are, and recycling market lore “wisdom” from big-shot investment managers as though they are original (FT). Worse, the FT is claiming that the IMF sees bank deleveraging, an absolutely necessary remedy for a burst bubble, as “capital flight.” If it’s really the IMF making this error and not the FT, we are in deep trouble.

Yes, it’s true that when banks are unwilling or unable to lend, it worsens a recession, but that doesn’t outweigh the original policy prescription of deleveraging as a necessary remedy. If you must have fiscal austerity at the same time or face a fine for violation, you are up the creek without a paddle. This seems to be news to the IMF, if we are to believe press reports, which wants the state (in the form of the EFSF and ESM) to take the default risk by injecting capital directly into banks. The new core troika of Germany, Finland and the Netherlands think direct capital is contrary to the spirit and the letter of various Treaties. However this turns out, the IMF is (again) inserting itself into political matters. (The IMF also chided the UK for excess focus on austerity and the US for being stupid about the fiscal cliff.)

It almost doesn’t matter whether the IMF is “right” when everything it embraces is contrary to free market principles. This trend at the IMF started when it saw that Malaysia’s capital controls actually worked during the Asian crisis in 1997-98. Now it accepts more than occasional intervention in a crisis--it seems to want government management of markets everywhere. Where’s the op-ed on that?

In a rational world, the euro should continue falling. We think it deserves to return to the July low of 1.2042 (before the Fed’s QE3), or at the least, 50% of the way there (1.2612). But it’s dangerous to base a forecast on sane and reasonable factors without consideration of the euro’s magic properties, and the sovereigns, among others, who are besotted by the promise of the euro in theory, whatever the facts on the ground. On the channel basis, a downmove should end today around 1.2835—in other words, New York should re-test the low we already saw. But don’t count on it.

	SPOT	CURRENT POSITION	SIGNAL STRENGHT	OPEN DATE	OPEN RATE	POSITION GAIN/LOSS
USD/JPY	78.33	SHORT USD	WEAK	09/04/12	78.46	0.17%
GBP/USD	1.5995	SHORT GBP	NEW*WEAK	10 /10/12	1.5996	0.01%
EURO/USD	1.2855	LONG EURO	WEAK	08/07/12	1.2403	3.64%
EURO/JPY	100.67	LONG EURO	WEAK	08/06/12	96.72	4.08%
EURO/GBP	0.8035	LONG EURO	WEAK	08/06/12	0.7943	1.16%
GBP/JPY	125.28	SHORT GBP	NEW*WEAK	10 /10/12	125.28	0.00%
USD/CHF	0.9415	SHORT USD	STRONG	08/07/12	0.9686	2.88%
USD/CAD	0.9788	LONG USD	WEAK	10 /04/12	1.0229	-0.75%
AUD/USD	1.0226	SHORT AUD	STRONG	10/03/12	1.0351	-0.09%
AUD/JPY	80.10	SHORT AUD	STRONG	10/03/12	81.05	-0.21%
USD/MXN	12.8830	SHORT USD	WEAK	07/30/12	13.2485	2.84%