Teetering on the edge – do we see a snapback or a fall?

The USD powered stronger today on the continued stumbling of European politicians toward nowhere in particular and with rumored Dexia breakup in the works. Meanwhile, the S&P500 is teetering on the brink.

Euro to new lows
Euro dipped to new lows yet again as the Eurogroup meeting yesterday saw a pushing back of a decision on the next tranche of payment to Greece as they preferred to see whether Greece is progressing on promised efforts to rein in its spending. So the Oct 13 troika meeting as postponed, meaning the next developments on Greece will have to wait until November – yet another sign of EU politicians’ inability to act forcefully in dealing with this crisis.

Among the various indicators Euro-stress indicators today – some suggest the pressure on the Euro here is actually somewhat lower or at least not worse, including rate expectations/spreads and basis swaps and Italy/Germany bond spreads, though the focus on Dexia and Belgian sovereign risk is a new and accelerating worry. After an earlier meltdown in its equity price, Dexia rebounded sharply from a near total meltdown earlier in the day and talks have transitioned to how to break up the troubled bank. Meanwhile, a Bloomberg article discusses how Dexia and French Bank BNP Paribas are carrying Greek sovereign debt on their books with only modest discounts to parity. It’s a scary situation all around – especially when we read that Dexia passed the stress tests with ease the last time around.

As for the EURUSD level, positioning is clearly heavy and we have technically oversold levels, so we’ll need to see an acceleration in the bad news from here to justify these levels short term and we’ve got an important ECB meeting up on Thursday – a classic set up for a short term squeeze in  a longer term bear market, though an all-out risk deleveraging could certainly delay such a squeeze until after the meeting and from far lower levels. Longer term, it’s worthwhile to take a look at a monthly chart as we do below for perspective.

Chart: EURUSD monthly
A monthly EURUSD chart shows the amazing symmetry in the moves since the pair topped out in 1.60. Those looking for patterns will look for the latest downwave to possibly extend all the way to perhaps 1.15 to 1.17. In the meantime, the pair has long shown a tendency to trade close to big round numbers, in which case 1.30 is the next logical target, with the 1.35 area as resistance.



AUD slips further down under
The dovish downshift at the RBA (as we said yesterday was likely on the way,) was no huge surprise from our point of view simply due to the weight of the evidence accumulating against a hawkish stance rather than due to the weight of the RBA’s previous rhetorical attempts to declare that it would try to remain unswayed by short term market developments and remain intent on fighting the risk of inflation. Instead, Mr. Stevens basically used the RBA meeting to open the way for a rate cut, though they fairly explicitly linked the trigger for a rate cut to incoming inflation data, so this will make the next inflation report a pivotal one later this month. The September Australia STIR future jumped 17 ticks on the news, further injuring the Aussie’s cause.

Helicopter Ben in the hot seat today
Today we have the spectacle of Fed chairman Bernanke testifying in front of the Joint Economic Committee, which includes Ron Paul, House Financial Services subcommittee chairman, libertarian/Republican presidential candidate and author of End the Fed. Bernanke is experiencing significant dissent within the ranks (more in terms of volume than in terms of numbers) as the Richmond Fed’s Lacker (not a voter at present) said that Operation Twist will not help the US job market in any material way and that “There are impediments to growth that somewhat lower longer-term interest rates would not be the antidote for….our role is fairly limited in terms of increasing growth.”

Also, Bernanke’s testimony is interesting today to test two things: the political heat from the Republicans (not only Mr. Paul) on Bernanke in light of the recent letter signed by House majority leader Boehner to essentially “cease and desist” and a measure of Bernanke’s mood and his determination to continue the helicopter drops should “conditions warrant”. Some have suggested his former certainty has softened somewhat as attempts thus far have failed to yield desirable results and as Fed forecasts have proved even more worthless than they were in the past. Others would suggest that Mr. Bernanke is so married to his life’s academic work that only an intervention or removal from office would see any change in his endless