Will The Currency Traders Sell The EUR/JPY And Other Currency Crosses … And Cause An Unwinding Of Carry Trades Globally?

An early morning financial report for October 8, 2010 with late afternoon update.


Today, a mild stock market sell off is underway, as the EUR/JPY, is trading at lower today at 112.81, with the day’s range so far at 112.67 to 114.18, which is down from its prior close at 114.16, this is a 1.14% decline in value; this being seen in the chart of FXE:FXY.

The Euro, FXE, is trading below its Friday November 5, 2010 close at 139.83; and the European shares, VGK, are trading lower than their close at 52.76; and HSBC Bank, HBC, is trading lower than its former close at 55.55, on concerns of lower profit.

The European Financials, EUFN, are trading lower than their former close at 23.49, on concern over rising sovereign credit debt default swaps of Ireland, EIRL …  Italy, EWI, and Spain, EWP, are trading lower.     

Abigail Moses of Bloomberg reports Irish Credit-Default Swaps Surge To Record On Bank Bailout Cost Concerns. Credit-default swaps on Ireland and its banks surged to record high levels on concern the cost of bailing out the nation’s financial system is unsustainable. Contracts on Ireland soared 28 basis points from a record closing level to 606, according to data provider CMA. Swaps on the senior debt of Allied Irish Banks Plc climbed 43.5 basis points to 899.5 and Bank of Ireland Plc increased 37.5 to 724.5. “The uncertainty regarding sovereign debt and deficits in the European periphery will remain a strain for risky assets,” Tim Brunne, a Munich-based strategist at UniCredit SpA, wrote in a note to investors. The extra yield, or spread, investors demand to hold Irish 10-year bonds instead of similar-maturity benchmark German debt increased 10 basis points to 531 basis points, near the record 534 basis points reached at the end of last week. Swaps on Allied Irish subordinated debt jumped 8 percentage points to 54 percent upfront and five percent a year, meaning it costs 5.4 million euros in advance and 500,000 euros annually to insure 10 million euros of the bank’s debt for five years. Subordinated swaps on Bank of Ireland jumped 2 percentage points to 31 percent upfront and five percent a year. The Markit iTraxx SovX Western Europe Index of swaps on 15 nations rose 3.75 basis points from a record closing level to 174.75. Contracts on Portugal jumped 9 basis points to 454, Spain climbed 9.5 to 259.5 and Italy increased 4 to 195. Greece declined 3 basis points to 195. The cost of insuring corporate bonds also rose.

Open Europe relates Irish Times reports that EU Economic and Monetary Affairs Commissioner Olli Rehn will arrive in Dublin later today to hold meetings with Irish Finance Minister Brian Lenihan and the opposition parties to discuss the government’s proposed budget cuts for 2011. Bloomberg quotes Jens Peter Soerensen, Chief Analyst at Danske Bank, a primary dealer in Irish government bonds, saying that “It’s close to a buyers’ strike at this point.”  

Shaun Richards in article  US Long Bond Yields Rise Whilst Ireland Continues To Weaken And Yet Another UK Company Has A Surprise:  “Being a rugby fan and also an economist I did spot something on Saturday. When Ireland played South Africa Lansdowne Road was by no means full. For those unfamiliar with the sport in ordinary times the Irish national stadium is packed and full of Irishmen baying for the blood of the opposition creating a fantastic atmosphere. However in a new ground with a capacity of 50,000 it was not much more than two-thirds full. I think perhaps we got there a symbol of the current state of Ireland and her economy.

This morning it appears that the opposition have decided not to support the four-year plan for the Irish budget which was announced last week. Also there has been a devastating summary of the Irish position in the Irish Times today by Morgan Kelly. For regular readers of my blog there is little new as they will be aware that I recommended that Ireland should go to the IMF back on the 17th September. However there are some nice if chilling turns of phrase in his article which include”:

“It is a testament to the cool and resolute handling of the crisis over the last six months by the Government and Central Bank that markets now put Irish sovereign debt in the same risk group as Ukraine and Pakistan, two notches above the junk level of Argentina, Greece and Venezuela. Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter. Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term. From here on, for better or worse, we can only rely on the kindness of strangers.”

Mr. Richards continues:  ”I find the rugby analogy works well. Because one of the issues with the low attendance for the rugby was the high ticket prices which involved having to buy a ticket for several internationals. So we are back to authorities being out of touch and living in the past with reality not catching up at all. One area where reality is very painful is Irish government bond yields which have continued to surge. Her ten-year maturity closed at 7.6% and is this morning at 7.75%. However there are just as significant moves occurring at the shorter end. The yield on her shortest-dated bond (as opposed to bills) has gone above 4% to 4.12%. As this bond matures in November 2011 it shows that Ireland is losing control as the official ECB central bank rate is still 1%.

We will find out soon how much support the European Central Bank has been providing Ireland via its securities Markets Programme. there have been plenty of rumours of it being active.

Credibility of Economic/Financial Statistics

There have been several issues on this front recently. Two have come from Europe with the Irish move on Promissory Notes that I discussed last week and the way that the President of the ECB Mr.Trichet has refused to reveal details of the Greek use of derivatives to misrepresent her financial statistics. This is not good.

You may also wonder why I have not mentioned the UK Producer Price numbers from Friday. This is because they are now on a new basis and I need some time to make a comparison.

This morning a UK Company ROK has announced that it is in financial difficulties which is surprising as it had said that things were fine only in September. I still remember the rights issue made by Royal Bank of Scotland in 2008 which was followed a few months later by its collapse and the way the company Connaught hit trouble recently. In summary we are in danger of a loss of credibility all round.”


Bond vigilantes called the Interest Rate on the US 30 Year Government Bond, $TYX, higher by 0.29% to 4.138%, on the conviction that the Federal Reserve’s QE 2 is monetization of debt. If you don’t or can’t take my position on this, then perhaps you might read the remarks of  Richard W. Fisher, speaking regarding the Recent Decisions of the Federal Open Market Committee before the Association for Financial Professionals in San Antonio, Texas November 8, 2010, where he said in lengthy discourse:  ”For the next eight months, the nation’s central bank will be monetizing the federal debt.”

As bond vigilantes call interest rates higher globally, the value of World Sovereign Debt, BWX, International Corporate Bonds, PICB,  Emerging Market Bonds, EMB, Junk Bonds, JNK, will fall lower.

Then risk appetite for carry trade investing will turn to risk aversion. The currency traders will buy the US Dollar, $USD, and  the Yen, FXY, to repay their carry trade loans to Wall Street and the Bank of Japan, and sell the currencies they invested in. The World Stock Yen Carry Trade, ACWI:FXY, will likely fall, turning the world stocks, ACWI, lower.

I believe the US Dollar, $USD, traded by UUP, will go up this week, and that the currency traders will commence global competitive currency devaluation, that is a global currency war against the central bankers and national leaders, over sovereign debt, and financial institution debt issues, resulting in the Hedged Japan, DXJ, the S&P, SPY, New York Composite, NYC, emerging markets, EEM, emerging europe, ESR, Russia, RSX, and the world shares ACWI, falling in value.

Also the Optimized Currency ETN, ICI, the Completion Index, ITO, and the Buy Write Opportunities, ETW,  Retail RTH, Gaming, BJK,  Consumer Discretionary, XLYS, International Discretionary, IPD, Wind Energy, FAN, Staples, XLP, International Utilities, IPU, Revenue ADRs, RTR, Capital Market Providers, KCE, will likely be falling in value as well.    

Mortgage REITS, REM, and Mortgage Backed Bonds, MBB should be observed, to see if they maintain their value, as the unstated objective of QE2 is, I believe, to maintain their value.

It is quite evident from financial market trading for the prior week ending November 5, 2010, that in addition to the Federal Reserve announcing QE 2, that risk appetite expanded yen carry trade investing, which provided seigniorage to commodity, stock and bond markets.


Should a bear market commence this week, it will seen in quite strongly falling values of currency driven ETFs, seen in the MSN Finance Chart of RZV, KROO, EWD, EWW, EZA, BRF, ENZL, CNDA, INP,  IWM, …. And also seen in the Yahoo Finance Chart of RZV, KROO, EWD, EWW, EZA, BRF, ENZL, CNDA, INP, IWM

This Finviz Screener of Currency ETFs will give insight into how currencies affect daily stock market trading as time progresses. Key currencies to watch, are the major world currencies, DBV, the emerging market currencies, CEW, the Australian Dollar, FXA, the Swedish Krona, FXS, the Euro, the Mexico Peso, FXM, the South Africa Rand, SZR, the Brazilian Real, BZF, and the New Zealand Dollar, BNZ, the Canadian Dollar, EWC, the Russian Ruble, XRU, and the Indian Rupe, ICN.

Today these currencies fell as follows:

Swedish Krona, FXS, -1.4 …. effecting Sweden, EWD, lower.
Russian Ruble, XRU, -1.3 … effecting Russia, RSX, lower.
New Zealand Dollar, BNZ, -1.2 … effecting New Zealand, ENZL, lower.
Brazilian Real, BZF, -1.1 … effecting Brazil Small Caps, BRF, lower.
South African Rand, SZR, -1.0
Euro, FXE, -0.8 …. effecting the European Shares, VGK, lower.
Indian Rupe, ICN, -0.4
British Pound Sterling, FXB, -0.4
Mexico Peso, FXM, -0.3
Canadian Dollar, FXC, -0.3
Australian Dollar,FXA, -0.1

Japanese Yen, FXY, +0.2
US Dollar, $USD, +0.6
Dollar Bull ETF, UUP, +0.6

Today’s rise in the Yen and US Dollar are largely attributed to profit taking and repaying carry trade loans.

World Sovereign Debt, BWX, International Corporate Bonds, PICB,  Emerging Market Bonds, EMB, Junk Bonds, JNK, should be observed to see the way they effect Total Bonds, BND, Aggregate Bonds,  AGG, and Lehman Aggregate Bonds, LAG, fall lower.

Precious Metals

Silver, SLV, rose 3%, Precious metals, JJP, rose 2%, and gold, GLD, rose 1.% today, as world stocks, ACWI,  fell o.4% and bonds, AGG, fell 0.05%, and commodities, DBC, rose 0.27%. Abundant historical records show that when a central bank monetizes its the country’s debt, then commodities, particularly gold and silver inflate in price.  

Concluding Thoughts

I believe the world is slowly passing from an age of prosperity into an age of austerity and hardship which will be marked by the end of credit and the establishment of a global currency system, by a global central banker, that is The Seignior, which is an Old English term meaning top dog banker who takes a cut.


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