Trade Team Update

As Sarah Palin would say, I'm feeling pretty dog-gone, gee-golly, aw-shucks good today... not because the global financial crisis is fixed and not because Jessica Biel returned my phone call... in my opinion I believe we saw the very first positive and potentially productive step towards stabilizing the markets and towards liquifying the markets in order to bring a return to order and functionality.

What I'm talking about is the move being made in Europe to stabilize the interbank lending market by providing liquid capital and loan guarantees. The Germans have offered €400 billion in loan guarantees and €80 billion in accessible liquid capital. France said it would guarantee up to €320 billion worth of liquid for European banks.

On the back of this news over €1.1 trillion in new loans were approved within the European money markets. That's what I like to see -- instant positive reaction to a plan that actually can accomplish the goal of unfreezing the credit market and easing LIBOR. The markets needed a confidence boost and I believe the interbank plan not only provides that boost but also provides the resources for these banks to ease their way back into the lending and credit process.

Tomorrow will be this plan's first test -- now I need to see follow through. I need to see consistency. I need to see dollar LIBOR rates come down tomorrow morning. I need to see the euro hold ground against the dollar that it normally would have lost due to high USD interest rates. I need to see some of this newfound confidence sustain in Europe. If we can see these liquidity measures do what they are intended to do the euro may have half a chance against the dollar this week. So, let me say I'm cautiously optimistic about what I've been seeing today.

Equities have been on fire today as just about all global markets are rallying on the latest offerings from the central banks. Once again, I need to see some follow through and sustainability with these moves. It's great to see the Dow go up over 700 points but if it gives back all those gains tomorrow, we go back to square one again.

Commodities sit in an interesting spot, especially gold. I see the $830-$820 as an important testing zone along with $75-$72 on crude. If crude and gold can find some support and bring out the buyers this would certainly help support the euro. Money flows out of Treasuries should also help the euro and I'll be watching for evidence of this.

EUR/USD:

The euro's first fundamental test is tomorrow with ZEW and Industrial Production. I cannot call ZEW EUR+ at this point. I think the panic that has been running through Europe the past two months is going to weigh heavy on ZEW and I would expect to see a downside print. The key will be seeing how strongly the market wants to react against the EUR should we get a downside number.

Trichet will be in NYC to deliver a speech and I'm sure he will refer to monetary policy as it relates to the financial crisis. I will be listening for any clues or signs on future rate moves. The markets are speculating on Trichet's next move on rates... will be another cut or a hold? That is the burning question right now. I believe if the European banking plan finds some success it will give Trichet a reason to keep rates steady.

As far as trading goes, I'm working through a different risk strategy right now that is more negative on the dollar and slightly more positive on the euro. My appetite to keep buying the dollar has eased back today. Believe me, I've not turned into a euro bull but I have growing concerns with the dollar, mostly with the sheer number of dollars that have been pumped into the money markets and money supply.

We're talking well over $1 trillion in hot-off-the-presses greenbacks flooding the market. I'm trusting that at some point in the near future market participants are going to finally wake up and realize the depriciative affects of an additional $1 trillion+ of USD being flooded into the global financial system. That is just a terribly USD- thing in my view. Eventually I believe the dollar will have to pay for Bernanke and Paulson's transgressions.

I'm also thinking that low rates + access to credit + high money supply = strong gains for equities. The printing of money creates inflation and the equities market loves inflation... a season of loose monetary policy and inflationary conditions created by a more liquified monetary base should send Wall St. soaring again.

Now if equities go up because of the cheap interest rates and easier access to credit that should mean that Treasury prices should go down and yields would go up. Money flows would come out of Treasuries and back into equities as risk aversion would be set aside. And in this scenario it should be good for the euro and bad for the dollar. If we can add to this scenario weak TIC data and that my friends is a nice little recipe for a good 'ole fashioned USD butt-kicking.

The USD fundamentals are not going to turn around this year, we will see weaker data as the year rolls along, that I am very sure of. There's also new talk of another US economic stimulus plan that is even bigger than the $160 billion plan from earlier this year. Lets see... the last plan didn't do much, it's had no longterm positive results, it created more debt, more inflation, and we want to do it all over again and do it bigger? Yeah, that's going to be real great for the dollar... there's very little that shocks me and yet somehow I still get shocked by the stupidity in DC.

The other factor that is giving me caution against buying the dollar is the seasonal price patterns of the EUR/USD. The prior two years the euro begins to make strong gains against the dollar starting around the third week in October and lasting at least through to the end of November. If this old price pattern returns I do not want to be stuck with euro shorts down here at these levels.

The fundamentals, of course, are different this year compared to last year and the year before. The euro is clearly in trouble and has severe fundamental issues to deal with. But I have to forecast some very weak dollar fundamentals in Q4. The Q3 growth, retail, and consumer data should be abysmal and I'm forecasting a nightmare holiday shopping season.

I think retailers will be at the mercy of a terrified consumer who won't bust out the credit card unless they see some serious discounts. I see the retailers and consumers having a battle of wills... the consumers holding out for the sales and the retailers holding out for the consumer to bend and begin to buy. Overall I see a very USD- scenario here.

The realist, idealist, and optimist side of me is thinking along these lines as it relates to trading the EUR/USD. At this point I'm not willing to take too many risks on the euro but I certainly do not want to be stuck in low euro shorts should market participants finally wake up and see what a mess the dollar is and why this smoke-and-mirrors strength cannot sustain over the longterm view.

In terms of where to put risk, my trade plan calls for taking risk on the euro unless the market shows me otherwise. I still may short the rises but as I said, I'm getting cautious with euro shorts at these levels. I don't think the euro is all healed up and back in the fight but if we can get some of these factors working I believe the dollar comes under selling pressure.

Right now we need the credit markets to stabilize and confidence to return to market participants in addition to dollar LIBOR easing. Tomorrow will be our first real test to see if this is actually possible.

Please be smart with how you handle your risk and money under these evolving conditions. Don't listen to me, take everything into consideration and mostly trust your gut and what you're seeing in the markets. The risks are enormous right now and most on the retail side should be sitting out until the markets stabilize.

The end-of-day surge in the Dow gave the euro a real nice boost in late afternoon... keep an eye on how Tokyo decides to respond to what Wall St. did today. If market conditions allow, I will post some key levels later on this evening. Overall, keep an eye on the 1.3720-50 level on the upside and the 1.3540-1.3480 level on the downside during Tokyo.