The Euro and the Dollar [FinancialSense]

I’d like to do a short-technical piece today to discuss the euro and the dollar. Before I go into the technical picture, let’s first summarize the fundamental backdrop. Now, the U.S. equity markets rose heading into the EU summit and launched soon after the details were given on the Friday morning of June 29th, which were:

  • Single Pan-European bank regulator by year-end ‘12
  • Once the supervisory mechanism was in place, the ESM could capitalize banks directly
  • Ireland to get better bailout terms
  • Spain to get aid from the EFSF until the ESM is up and running, without gaining seniority status on the debt
  • ECB to act as agent for the bailout funds
  • €120B growth pact

euro supply zone

Since then, concerns have shifted to a weak Eurozone and the effect it will have on U.S. multinational companies. We had more negative preannouncements heading into this quarter than in the last earnings season and that has investors on edge. At the same time, we know that central banks are leaning hard in the accommodation direction. ISI Research counted 65 policy eases in the month of June, globally; in addition, we started July off with a quarter point cut in the ECB’s rate to 0.75%, England restarted QE with a £50B injection, and the People’s Bank of China cut rates a second time in the last month. As a bear, it’s a lot riskier shorting the market while central banks are easing. Central bank surprises are to the upside. Our own Federal Reserve Bank has extended Operation Twist, but that’s it. Investors are wondering what kind of jobs number or manufacturing number is it going to take to trigger QE 3. We’re already near similar price statistics the Fed used to initiate QE 2 in 2010. Look where oil is, look where the CPI is, and look where the CRB commodity index is as I mentioned last week.

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