CNBC Video

Not my first choice of topic, but what they wanted me to discuss.

Currency movements are nearly impossible to accurately forecast due to continuous cross currents.

The overly flattering intro was a pleasant surprise that caught me out for a moment.
And I’ll shamelessly use it selectively to advance the cause.

>   (email exchange)
>   On Sat, Jun 12, 2010 at 10:09 AM, wrote:
>   great…every exposure counts…….question on Euro call to 1.5-1.6 area

Remember this is not ‘trading advice.’ In fact, the charts still look terrible so the portfolio shifting may be further from over than I suspect. It is a statement that the forces that brought the euro to those levels not long ago are still in place, though recently overpowered by the portfolio shifting.

>   my understanding of what you’ve said previously is that the deflationary
>   measures to be followed by Greece, Spain, Portugal, Italy and Ireland would
>   bring about even lower growth in euro block and result in increasing strains
>   on the political union with the possibility of the euro group breaking apart
>   in some fashion with a continuing decline of the currency. Is this correct?


>   What are you saying now?..thanks

Those same deflationary forces that scare some people out of the currency also make the currency more valuable.

Note that Japan hasn’t done particularly well yet the yen is a very strong currency.

Also, sometimes a nation growing rapidly has ‘automatic stabilizers’ in place that automatically increase tax collections and reduce transfer payments as growing private sector credit expansion fuels the growth. That can firm up a currency as well, as it also attracts equity type portfolio managers due to the growth environment.

Always lots of cross currents!

The eurozone deficits had seemed to have gotten maybe high enough to stabilize growth just as market forces shut down any thoughts of continued fiscal relaxation.

Those higher deficits softened the currency some and then fear took over with the default risk pushing the euro down further and gold up as well, also out of pure fear.

The euro then went low enough to apparently firm up exports, which also tends to firm up the currency.

Tightening up fiscally now puts a lid on growth and even threatens negative growth. The fledgling export recovery will work to shut itself down via euro appreciation with dollar buying-off balance sheet deficit spending and what would at least ‘make the numbers work’- prohibited ideologically.

And with their current monetary arrangements there isn’t much they can do except sit there and suffer the consequences of those arrangements.

The only bright sign is that the ECB may be sneaking towards interest rate targeting for the member nations outstanding debt, which can go a long way towards alleviating fears of credit risk for the national govts. But to do that the ECB has to be buying without notional limits, so it’s too soon to say that’s what’s happening.