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Technical Update: Mild Reversal Or Something Worse?

  • Written by Syndicated Publisher 63 Comments63 Comments Comments
    December 4, 2011

    What may have seen as a mild reversal and what may appear as some blogger being ultra bearish let me explain how I view today’s price action. I believe today was a pretty significant day even though watching paint dry may have been more exciting at times.

    On Wednesday the central banks across the globe said there was a crisis and that crisis was fueled by a shortage of USD. Normal access to USD interbank lending facilities has been shut off to those deemed too excessive of a counterparty risk. Without some emergency action we very well would be reading about a major bank failure somewhere in the world. The markets rejoiced, the USD fell and the EUR rose. All seemed well, until today.

    I suspect the central banks did nothing but simply push off the news of that bank failure. Today the currencies showed that demand for the USD is greater than what the central banks could offer the markets. What the Fed, ECB, etc did was help those in the system gain access to interbank lending.

    The efforts of the central banks highlighted a problem and in doing that made participants ask what are they not telling us. What else is out there that I should be concerned about. In essence they took a large problem and made it even larger. Market participants will now flee to safer trades and will buy USD and US Treasuries. So in essence the central banks exacerbated the problem.

    This may seem like a long ramble about today’s price action but based on how I view this trade I believe it is very significant. I’ve been very outspoken that I see this trade upon us as one of the few macro only trades one can do in a career.  This is a credit driven trade that equity will eventually be forced to acknowledge. The global economy is experiencing a credit freeze right now.

    Some of the largest banks in the world, some larger than the GDP of the country they reside are on the edge of failure. What makes things that much worse is governments are no longer in a position to bail them out like they were in 2008. Why? Because private capital is fleeing sovereign bond markets.


    USD – The dollar put in a huge reversal today and took out key resistance levels. If the Fed was able to quench the thirst for USD this should not happen today. The USD is still in demand. Eventually it will pop like a ball submerged under water as has historically happened (second chart).

    EUR – Huge reversal as well after a failed breakout attempt today. If Europe was fixed why are people selling the Euro? Investors are telling EU leaders that they do not agree with the policy to date. The danger lies in not addressing this problem in the coming days. Remember in 2008 once investor fears grew strong enough TARP was unable to stop the immediate slide.


    Some very bearish six month daily charts on the 10 year yield (TNX) and 30 year yield (TYX) below. After bouncing on the central bank news on Wednesday they have recaptured the down trend within a much larger downtrend. The 30 year was down 10 bp today and the 10 year 7bp (100 bp or basis points equals 1%). Those are big moves.



    Bottom Line

    It’s important to wrap your brain around this trade. The mainstream media like CNBC will say today’s selloff perhaps was driven by the NFP report or news the US will try and block lending to the IMF. Nonsense excuses from people who either do not understand what is going on or what you to believe something else.

    This is a credit driven event. We need to look to credit for signs of deterioration or improvement. So far all I see is deterioration and now it has bled into the currencies. In fact if the central banks did not offer the markets the swap lines on Wednesday this market was on the verge of a major move lower based on the currencies and a bank failure(s).

    What amazes me is we have a beautiful roadmap from 2008 as to how this plays out yet the vast majority are not using it. Interbank lending freezes up which freezes up the global credit market and thus the economy. Emergency programs by the central banks are launched, banks fail and eventually money printing is enacted. The same is happening now. The road to get there is also the same.

    Images: Flickr (licence attribution)

    About the Author

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