Yesterday and today we are getting a revulsion against risk

Outlook:

We can’t resist mentioning that Junker, who is retiring soon, had to pat himself on the back for contributing to the improved euro. What is the purpose of Continental self-congratulation? We judge that it’s Draghi who deserves the credit. It was Draghi who stood up to the Bundesbank and said “whatever it takes” in July. It was Draghi who said “no punch bowl” last week, now fix your economies. To be sure, Junker’s job is mostly behind the scenes but the desire for applause is unseemly. The best we can hope for from this impulse is a tell-all book, but that seems to be an American vice, not a European one. Too bad.

As for the World Bank saying the US budget crisis has the potential to be worse than a re-opening of the European sovereign debt crisis, this is probably true in an objective overview, but to feature it as a top story in the US top financial newspaper is somewhat insulting to Pres Obama, who declared (more than once) “we are not a deadbeat nation” and the bills will get paid. Obama has confused matters by refusing to use the 14th Amendment (“US debt shall not be questioned”) but presumably he has something up his sleeve, or maybe several somethings. When he says he refuses to negotiate the debt ceiling, we should believe him. What analysts are missing is that there are two things going on at once. The first is exactly how Obama is going to deal with the government being shut down if a debt ceiling deal is not achieved. Some of the nitwits in Congress are on TV saying “let’s go for it.” We feel confident he has a plan of some sort. It may not be a good one but it’s not nothing. Refusing to disclose it is good bargaining.

Second is that you should negotiate only with someone who can deliver an outcome. You don’t pay poker with a pauper (and Obama likes to play poker). We know House leader Boehner cannot deliver the Republicans—he couldn’t even get a vote on his own Plan B. Therefore, despite his contemptuous and arrogant tone, Obama is wise to decline to negotiate.

This is not to defend Obama or the US. The whole thing is a disgrace and an embarrassment. But to liken it to the European debt crisis is wrong. The US parameters are fairly well known. In Europe, they are still making it up as they go along. We take very seriously that bank bailouts by the ESM, a top factor in “ending” the debt crisis, are now in doubt and not likely to get settled or another 6 months or a year. This leaves Ireland and Spain in distress. It would be naïve to think the debt crisis is really over, and that’s without considering Greece, which is almost certain to fail again.

Yesterday and today we are getting a revulsion against risk that is entirely appropriate and well-founded, if exaggerated. Again, watch the AUD, our canary in the coal-mine, or even oil. Both are treading water in a sideways manner but with an upward bias, implying that risk aversion may be short-lived. Market News reports that FX traders are biding their time and looking “for better levels to go long the euro and dollar-yen, [expecting] a test of the psychological $1.35 and Y90 levels.”

	SPOT	CURRENT POSITION	SIGNAL STRENGHT	OPEN DATE	OPEN RATE	POSITION GAIN/LOSS
USD/JPY	88.25	LONG USD	STRONG	10 /17/12	78.71	10.81%
GBP/USD	1.6049	LONG GBP	WEAK	01/11/13	1.6058	-0.40%
EURO/USD	1.3313	LONG EURO	WEAK	11/26/12	1.2970	2.64%
EURO/JPY	117. 47	LONG EURO	STRONG	11 /21/12	105.38	11.47%
EURO/GBP	0.8295	LONG EURO	STRONG	11/26/12	0.8095	2.47%
GBP/JPY	141. 61	LONG GBP	STRONG	11/21/12	131.02	8.08%
USD/CHF	0.9 290	SHORT USD	WEAK	11/26/12	0.9284	-0.06%
USD/CAD	0.9853	SHORT USD	WEAK	01/03/13	0.9858	0.05%
AUD/USD	1.0554	LONG AUD	WEAK	01/03/13	1.0506	0.46%
AUD/JPY	93.13	LONG AUD	STRONG	10/17/12	81.19	14.71%
USD/MXN	12.6302	SHORT USD	WEAK	11/26/12	12.9780	2.75%