I liquidated my gold position after taking a massive profit. Apparently a lot of other traders did this too because gold dropped fairly heavily today. I think gold might be a buy soon, simply because I think Indian economic gains will help the precious metal (Indian people love gold more than any other type of Jewelry). This is a more long term idea though, and right now the oil sell-off might trigger a prolonged commodity sell-off that I do not want exposure to. I think a better bet is that the Euro will decline in face of subpar economic data. The news is also full of rate-hike preparations being done by the fed, which will strengthen the dollar.

USD:

1. Recent consumer spending reports came out positive, showing that the US consumer is buying things even though the consumer confidence report is slowly dropping. Compared to bad Euro Zone data I think this will still strengthen the dollar. $$
2. China’s economy has been extremely liquid, with the number of Chinese loans going through the roof as large numbers of people are investing in homes and development projects. I think this is probably a speculative bubble that the Chinese government is going to continue to clamp down on, strengthening the $. $
3. US Jobless claims revised down. $$$
4. “In one example of demand for such assets, auctions on four-week Treasury bills have attracted an average of $5.47 in bids for every dollar sold this year, compared with an average of $3.77 last year, according to Bloomberg data. Yields on the four-week bill were quoted at four basis points at 3:47 p.m. in New York trading from 18 basis points a year ago.” –Bloomberg. Heavy demand for US Treasurys is going to push up the $. Also there are rumors of a rate hike. $$$

EUR:

1. Credit Suisse was sold off this morning despite turning a profit, reflecting fear about Euro zone banks. -€€
2. The Euro Zone posted slow data. More importantly, it posted strong data in some countries like Slovakia and Germany but contractions in the areas that hurt the most like Spain, Greece and Portugal. I think this news supports my “Deconsolidation Short” theory you can read about in previous posts. -€€
3. The Euro Zone promised to bail out Greece, but with terrible economic data coming out, the Euro still relies on Grecian people to pay higher taxes and go under austerity measures during a contracting economy. -€€€
4. 4. Technicals: EUR/USD: The downtrend on the Eur USD underwent a strong technical pullback on the 15 minute chart. When the pullback started to break I shorted near the key resistance point of $1.3600/€

USD: Overall the US Dollar should be fairly flat for the next couple of days as the Euro consolidates (unless there is a technical based sell off not based on fundamentals which I view as unlikely)

1. Fannie Mae and Freddie Mac are looking terrible, making the US market rebound look slightly irrational. The US government holds a lot of real estate liability (almost all of it) and has unlimited downside. I think this is terrible for the USD. -$$$
2. Coca Cola and McDonalds beat earnings because of their improving Asian sales. The United States brand-entity sucking up profits from abroad is good for the future prospects of the US economy. $
3. Wholesalers trimmed inventories which is implying that the US may be doing even better than expected. $$
4. The European Union Trichet is being forced to respond to Greek Debt concerns. Ultimately, this is going to add a lot of stability to the Euro and weaken the dollar as a fear currency. €€-$ However, in the long term I do not really think government posturing is important. I am long-term bearish on the Euro because it is a non-consolidated currency that has a lot of strength priced in due to its supposed consolidation. I try to wait and short the Euro before market moving events
5. Nobel laureate Joseph Stiglitz said Greece’s budget-deficit reduction plan will prevent a default, and reiterated his call for the European Union to aid the nation against “speculative attacks” in financial markets. €€-$

Gold: A play on gold right now is not an inflation hedge so much as a belief that the USD is not the safest haven for investment due to the potentially dangerous explosion of the real-estate market. This play is driven largely on the sell-off of gold at $1100 an ounce.

1. Earnings in the US are being driven by Chinese sales. The Gold sell off was driven on the rationale that Chinese markets would stop demanding major commodities such as gold with their declining spending. $1104/oz is about the level that gold should rebound to if these concerns have been alleviated. GG
2. Oil is trading up massively (over 3% as of 2:59 PM) which implies that commodities are back on an uptrend.
3. Both inflation protected Treasurys and Treasurys are being sold off, but TIPS more so. Inflation fears boost gold prices. Additionally –GG
4. Agriculture has stayed flat even though a bumper crop has been announced. This doesn’t really make sense because supply is going to glut the markets. The fact there has not been a sell off implies that investors are responding positively to commodity exposure again which will benefit gold in the short term. GG
5. On the other hand, low food prices are going to lower inflationary concerns and depress the value of gold as an inflation hedge. –G
6. The Gold market is heavily up after hours (ABX especially) implying anticipated price increases. GG

I covered my short on the Euro for two reasons. First off, after making a bit over 20% on my total account value in a couple days due to my large Euro short, I realized that other traders probably made windfall profits and are closing out their short positions to lock in profits. I closed out on a bullish engulfing pattern on the 30 minute chart which sure enough triggered a slight pullback where the Euro still is as of 9:06 PM. I want to emphasize that I’d still short the Euro, but I’d be wary going short now in face of what I view as a likely pullback after a relatively tame weekend of news.
There has been a massive gold sell-off, which implies that the market consensus is viewing the USD as the safe haven rather than the precious metal. I think this is going to cause a major move today in the gold markets, which is where I will therefore focus my efforts.
1. Geithner is defending the US bond rating. I think this is paradoxically going to hurt the dollar because he is acknowledging Moody’s potential downgrade as remotely credible instead of simply ignoring it and letting it pass. Spanish bonds faced a similar problem when their finance minister dismissed comparisons to Greece, thus adding some validity to them to begin with. -$$, G
2. The mortgage bankers selling their building for a loss is now planting fears that the US housing markets are getting ugly. The Wall Street Journal has been publishing repeated housing bubble articles. -$, G
3. A Chinese deal to buy Australian coal will bolster the commodity sector as a whole which is teetering on a sell-off due to a potential decline in emerging economy demand. GG
4. Gold companies had an absolutely ridiculous day on the markets with Barrick Gold gaining over 5%. That type of demand for gold companies will surely translate into increased demand for gold. GGGG
5. Real estate is trading down in the pre-market, exacerbating my fears of a bubble-pop based sell off on the US stock market. Also, the government is holding a massive amount of mortgages. If these start going south, then the government’s credit rating will be undermined. -$$, GGG

Though right now I think market participants are over-reacting slightly to the Euro-zone problems, I think they are highlighting what I keep mentioning. The Euro-zone is a bastion of unequal economic output. Spanish youth are unemployed at over 40% whereas last I read their German peers are unemployed at under 15%. Certainly the United States has California to account for, but Spain, Italy, Portugal and Greece comprise a massive part of the EU and are potential credit risks. Consider for a moment why the Euro ever appreciated to $1.40 to begin with. The so-called “Single Currency” was supposed to replace the US Dollar as the world’s most important exchange. Much of the Euro’s economic value (not to mention its nickname) was to be found in its relative solidarity, and now that this is falling apart I think the markets are going to take that value away. At the same time, the commodity sell-off is going to take away strength from the Australian and Canadian dollars, adding strength to the dollar’s resurgence. I will maintain my short on the EUR/USD pair until I see a reason to buy Euros.

USD

1. Treasury yields are up slightly making the USD more attractive.
2. Gold is being sold off before the markets open, reflecting dollar strength but also dismissing beliefs in inflation. $$
3. Cisco systems stock is up substantially along with Borders. Despite economic data, the strength in the tech sector and the beat down consumer sector in the equity markets will bolster the $
4. Steel Dynamics missed earnings pretty hard and is trading down over 5% premarket. Considering that oil and gold are also trading down I can see commodities based currencies going into a sell off that benefits the USD. $$
5. Visa beat earnings fairly substantially, which while frightening for the US consumer, probably means the consumer credit markets have been doing better than expected. $
6. Chinese banks were highlighted by Fitch and Moody’s as having extremely low credit ratings (Sub D-)
7. Economic data came out that said US workers are more productive and getting paid less. If you think about that closely, that should increase the value of a $ insofar as it is backed by the value of an hour of work. $
8. Initial jobless claims fell below expectations slightly. -$$
9. Today is a fairly dangerous day to trade on technicals due to the sheer number of reports coming out including: 6:00 Monster Employment Index, 6:00 Monthly retail same-store sales, 7:00 BoE Announcement, 7:45 ECB Announcement, 8:30 Initial Jobless Claims , 8:30 Productivity and Costs , 9:00 RBC CASH Index , 10:00 Factory Orders , 10:30 EIA Natural Gas Inventory , 4:30 PM Fed Balance Sheet , 4:30 PM Money Supply

Euro

1. The Euro Zone is not raising interest rates and Britain is halting its bond buying program. Increasing interest rates strengthens a currency. -€€
2. WSJ: “Greece’s five-year sovereign credit default swap spreads were recently at 4.23 percentage points, compared with Wednesday’s closing level of 3.97 percentage points, according to to CMA DataVision. That means the annual cost of insuring €10 million of Greek government debt against default for five years had risen €26,000 to €423,000”. -€€€
3. Spain and Portugal are also seeing their Credit Default Swap spreads widening further. -€€
4. The Portugal Index is trading down over 4% as of 8:47 AM. Spain is trading down over 3% whereas the US is only trading down .66%. -€€
5. A Giacommetti statue sold for $104.3 million. Considering Europe is an art hub, I think this might push up the Euro as cultural goods come in increasing demand. €

Overall: While losing some money shorting the Euro at such a low level (1.3890), I think there is substantial upside in the US dollar as it becomes increasingly clear that the US economy is afloat (at least in the short term). Though the EU voiced its support for Greece, I ultimately do not think Greece will get bailed out, and that this entire fiasco will put downward pressure on the single currency simply by virtue of highlighting the economic disparity between the EU’s member states. Furthermore, as of 10 AM, there is such heavy selling momentum on the Euro that I think a lot of the Long-side traders are going to have to take their liquidity to the sidelines as they lick their wounds (the Euro more or less fell off a cliff after hitting the 1.40 mark).

USD: I think the economic data should strongly bolster the US currency.

1. US Unemployment beat expectations. This is critical because it alleviates inflation concerns. Combined with previously good housing numbers, this is a good sign for the dollar. $$
2. Piper Jaffrey dominated its earnings. It is a small-business investment bank, which I think shows that financing in the United States is still affordable. $$
3. Moody’s warned it could cut the AAA rating of the US if it did not stabilize its debt levels relative to GDP, though it said the plan to reduce the deficit was a step in the right direction. -$
4. Retail sales and home sales were up while UPS tripled its earnings. This should benefit the US economy. $$
5. There is a bond sale next week denominated in US dollars. The treasury is cutting estimates for government borrowing by 18% thanks to Tarp repayments. Foreign investors who want to buy US bonds will need $ to do so. $
6. California is looking ugly to PIMCO fund managers, with a ballooning deficit. You have to respect Schwartzenegger for trying to cut it, but other politicians may not support him. California is the US version of Greece, but to a lesser extent. -$

Euro: I think the Euro should stay about flat in absolute value, but will depreciate relative to the dollar.

1. Greece’s credit default spreads narrow as the EU accepts Greece’s budged deficit reduction plan. Nonetheless, we have to see if Greece can actually reduce its budget deficit. €
2. BP is having capacity problems in Europe due to political pressure. This highlights problems of doing business in Europe while other oil companies are doing well. -€
3. German unemployment increased slightly, partially due to “bad weather.” -€
4. German business confidence is up. €
5. The United States market is beating Europe on a dollar adjusted basis as of 10:00 AM on a 1 day, 5 day and one month basis. I think this will attract capital to US markets as opposed to European ones. -€

My view: While incorrect in the short term about the depreciation of the Euro against the dollar, the rate remains solidly under the $1.40 mark, a key psychological resistance. While there are certainly many problems with the dollar, I think the unilateral federal system provides a better relief mechanism than does the EU’s more disjointed but subtly German-dominated banking system. While I love the German economy, the performance of member countries like Spain, Italy and Portugal will drive a wedge in the Euro making logical interest rate policies hard to create. I am going to hold my large bet against the Euro, though it is highly unprofitable at the moment as I am waiting for a large move on the daily chart (probably coming Thursday or Friday).

US:

1. The Obama budget predicts six years of above average growth, and no interest rate problems. I think this is fluff. The deficit is too large. Raising taxes on the wealthy will encourage the financial sector, which ultimately pumps a lot of foreign cash into the US economy, to move elsewhere. This will undermine the long term strength of the dollar. Also, Obama’s budget is going to raise our indebtedness to GDP to over 70% (it is currently about 55% of GDP). The average American household is paying about $800/year on our debt interest payments. -$$
2. The Volcker rule wants to put caps on proprietary trading at big banks. This will affect the currency desks unpredictably, but will lower the liquidity of the currency market in the long-term. I really hate these limits. This is personal, Volcker.
3. BNY bought out PNC’s investment branch at a high P/E to its earnings. I think this is a bullish sign that reflects PNC’s liquidity problems if anything. The deal should add some confidence to the dollar, but also might pump up the markets which makes it somewhat neutral on a short-term basis (remember US stock performance and US dollar performance is negatively correlated). $
4. The Australian Central bank did not raise rates today which increases the value of the USD relative to the Australian, certainly but also might have a bearish effect. The dollar is currently pricing in the likelihood of a rate hike, and if world banks are actually not raising rates for a while, this probability might be considered to go down. Rate hikes make the $ appreciate, so less probable rate hikes mean the dollar might decline. The Australian deal also highlights the importance of China’s policies to the country. 20/20 economists surveyed predicted a rate hike, but because Chinese demand for Australian goods will probably be lower with less stimulus spending, the central bank decided against a rate hike. -$
5. Moody’s released a somewhat dire report about the refinancing needs of many junk-rated companies in the upcoming years which is not good for the $. -$
6. Random Energy Bet: Suncor just missed its earnings heavily while Royal Dutch Shell is announcing big plans to harvest ethanol from Brazillian sugar cane. I say short Solar companies such as First Solar.
7. UPS Earnings generally came out positive, with some lower revisions as to the company’s future business. This is viewed as a major economic indicator which is good for the US. $$
8. “The Commerce Department said on Friday that GDP rose at 5.7% pace in the fourth quarter, its fastest in three years. Slower liquidation of inventories held in warehouses and stockrooms is contributed about 3.4 percentage points of that growth.” -WSJ. Inventorygrowth is a one time thing. Still, consumer spending has been growing, but this after the tape analysis is not good for the USD. -$
9. The two-year note is down yielding 0.863% and the the 10-year is down, yielding 3.667%. As rates lower, the USD seems less attractive. -$

Europe:

1. Spanish jobless claims are up big time. This, in my view is utterly damning news for the Euro which continues to perform on an uneven keel. Germany is doing very well while Italy, Spain and Portugal are running massive deficits reflected by their huge Credit Default Swap spreads. -€€€
2. “The dollar slid against the euro early Tuesday in New York as speculation that the European Commission will endorse Greece’s plan to reduce its budget deficit Wednesday lent support to the single currency.” -WSJ. This certainly hurt my trade that the Euro will continue to depreciate against the dollar. However, I think Spain’s poor employment numbers are going to reduce the speculation that the European Union will bail out Greece. European officials want to avoid a slippery slope, and bailing out Greece would set a bad precedent. -€€
3. “With interest rate verdicts due from both the Bank of England and the European Central Bank on Thursday, market participants remained cautious in case of further surprises.” I think now that Australia has surprisingly not raised rates, Euro banks will be likely to follow suit. Lower rates means a lower Euro. -€€
4. “However, in the overnight fixings, the U.S. dollar rate moved up to 0.17313% from 0.17063%, while sterling was unchanged at 0.51375% and the euro rate remained at 0.28125%.” -WSJ. Interest rate parity says USD up vs Euro. -€

Net: I am going all-out short on the Euro against the dollar.

Dollar:
1. US Domestic product came out good which will cause the dollar to rise substantially. $$
2. The US market outperformed the European markets very strongly today which will spur demand for dollars as the Euro no longer appears to be a safe alternative. $$
3. Article in Bloomberg says that the dollar is going to be critical in financing the world economy for a long time.
4. Bernanke won a new term giving the market relative confidence in the short-term. Reinforced the dollar as a safety currency. $$
5. US Tech Earnings supposedly are going to come out bad. Keep in mind this is one area where the US has competitive advantage over other countries. -$
6. The Brazilian Real is having some troubles related to Chinese credit markets, which will have the affect of increasing global risk aversion and strengthen the dollar. $
7. Somewhat concerning to me is the fact that crude prices are not going up strongly. It implies the US economy is not out of the woods. I think crude prices are somewhat driven by bullish sentiment on emerging markets that bad news in China and Brazil might be interrupting though, so this tempers potential downside. -$

Euro:
1. Greece and Portugal’s fiscal problems are causing a massive sell off on the Euro. No one wants to hold Euros, and the leverage of the currency market might cause the currency to fall massively. -€€€
2. The EU does not want to bail out Greece and they have shown very consistent management/honesty issues. I think this unwillingness is going to drive a wedge between Euro countries and stop “consolidation” bets. The strength of the Euro is largely driven by its potential alternative status to the dollar as a world currency. -€€

Technicals:
Now that we are looking at major macroeconomic movements I think we are on the verge of a big move. I am looking at the daily chart. I think the 1.3730 is a key resistance that is going to be broken through before a full-on free fall commences.

My last short on the Euro was very profitable, but I need to reassess if I can hold onto the net-short position given new economic reports etc.

US Dollar: In the short term, stronger. Watch out for real estate though

1. Jobless claims down and Industrials up on economic reports make the US look much relatively safer than Europe. $$
2. S&P 500 down, which implies the dollar is rising. Fannie Mae and Freddie Mac are concerning though, because they have dropped heavily (2%+). This is tempered by the fact that Citigroup and many major financial firms are going up, so correlation not fundamental value may rule the day. $
3. Bernanke likely to be confirmed, will ad stability, which benefits the $. $
4. I don’t like the home sales decline because of the mass purchase of mortgages by the government. If sales are falling even with artificially low rates, I view this as a very bad economic sign that will hurt the dollar if the government is holding assets that are going to go toxic. This view is reinforced by the idea that Citi is considering selling its real-estate unit. -$$

Euro:

1. European markets are down far more than the dollar which implies that the dollar will strengthen. -€
2. Greece looks like it was illicitly trying to sell dangerous debt. I think this might cause a free fall in Grecian debt markets and endanger the stability of the Euro-zone despite Trichet’s firm guidance. -€€
3. European industry is becoming more positive, but consumers are not. Overall, the industry probably has more objective expectations than the buyers (or at least I think the market will think so). €
4. The German Economy raised outlooks. I think Germany is very stable, and much better than the other Euro countries. On one hand this strengthens the Euro but it also exacerbates the difference between member countries. On the other hand, German unemployment just rose which should in net slightly weaken the €. -€

Technicals:

The US dollar has been strengthening steadily on the 1 hour bar, but I believe the next important pivot point is about 1.3950. I think prices will consolidate around this area before falling again

Overall: I am short the Euro again at $1.3953. I might increase my position at $1.3950 and am looking to exit around $1.3900 or $1.3970.

Overnight play: Short €/D pair.

Since November, there has been about a .43 correlation between the US markets and the EUR/USD pair, implying that good economic news hurts the dollar’s value against the Euro on a day-to-day basis. The Vanguard European index has an even stronger correlation with the EUR/USD pair, implying that good economic news for Europe also hurts the dollar on a day-to-day basis.

US: On net, I think the dollar should weaken substantially against the Euro according to US news.

1. Good earnings out of Blackrock imply heavy demand for indexed investing products. This implies increasing risk appetite, which should go against the dollar, especially considering that Blackrock’s growth indexes were in emerging markets. -$$
2. Good Yahoo earnings are a fairly bullish sign for the US economy, which should give lift to US markets therefore hurting the dollar. -$
3. Fannie Mae and Freddie Mac will use taxpayer money to eat as many mortgages as the Government needs to sell. I personally think the markets have been burnt hard by mortgages, which have separate interest and principal payments that are hard to analyze. The Wall Street Journal indicates positive short term sentiment on mortgages, which is causing Fannie Mae and Freddie to trade up heavily. The restoration of US fixed income markets should benefit the dollar. $
4. Bad earnings at Caterpillar imply the US industrial sector is not recovering well. This is balanced by Boeing reporting good earnings. Neutral.
5. Toyota has taken serious damage, which bodes poorly for Japan but might benefit the US auto industry’s market share and in turn benefit the dollar. $
6. News about the massive deficit should cause concerns about the safety of the US currency and therefore weaken it. -$
7. Pledge to keep rates low, and economic recovery promise by the GOP (how does this make sense). -$

Europe:

1. The credit spreads on Greece are going up, which is bad news for Europe and should continue to depress the €. -€
2. There is a truly terrible article about European hegemony in the WSJ. -€
3. The German Index had a strong opening, up over 1%, outpacing S&P futures. €€
4. Portugal budget deficits are looking ugly. -€
5. Chinese business stimulus problems. -€ due to risk aversion

Technicals:

1. Weak downtrend on the 1 hour bar.
2. Hammer at the end of a downtrend on the 1 day bar may imply bullish reversal
3. The dollar seems to be going on a very serious uptrend of late against the Euro, after its huge beating for the last couple years.
4. Hovering close to resistance of 1.40, occasionally breaking through before going back up. Says the market is hesitant about the dollar’s appreciation. $1.40 seems like a very critical price point.

The question, I think boils down to who we think is more irresponsible with regards to their fiscal policy, the United States or the Europeans and how that interacts with the current price of the € at around $1.40. I think in the short term, the clear trade is to short the Euro and go long the dollar. There are lots of reasons to be confident about the US market in the short term, and I think our deficit has been talked about quite a lot lately whereas the news about Portugal just came out. I’d wager that Spain and Italy are going to destabilize the Euro a bit too.

Regardless of how good the news is about the world’s risk preferences, I think the general macroecomic picture is pretty ugly and that the Euro is a bad safety currency. I am not yet adept at trading the Yen, but I am sure Toyota is messing with it.