The BOC announced that rates will remain on hold and the Canadians will watch to see what happens in Europe as an important indicator of bank policy. It is unanimous that all central banks are concerned about the economic situation in Europe. Even the Chinese have noted the deterioration in Europe as a reason to be cautious about trying to slow the economy too quickly. However, in a confusing headline, “IMF PREDICTS MODEST GROWTH AS EUROPE STARTS TO EXIT RECESSION,” the Washington Post seems to think the worst is over for Europe. This headline is off base as the body of the article reveals, but such is the crap that drives the markets. IMF Managing Director Christine Lagarde is begging for increased funding for a bigger firewall for Europe and then this headline appears. Which is it: Crisis averted or further vigilance and action necessary to calm the European debt markets?
The U.S. Treasury stated today that no more money will be forthcoming to the IMF so it will be up to others to provide for added money to backstop the European nations that need liquidity to forestall a credit collapse. Anybody who believes that Europe is exiting its shallow recession OUGHT to be loading up on Spanish debt and getting short the German two-year note (the SCHATZ). Oh well, another case of flawed models leading to flawed policy or as others may opine: MONEY TALKS AND BULLSHIT WALKS.
***Building on the lack of credibility on Europe’s exiting its recession, let us analyze the EURO/SWISS CURRENCY CROSS. All currency traders are aware that the SWISS NATIONAL BANK (SNB) has drawn the proverbial line in the sand at 1.20 Swiss rate to the euro. After said policy was announced, the EUR/CHF cross rallied to 1.25 and the market paid a modicum of respect to the policies the SWISS were trying to sustain in an effort to weaken the currency that was having a deflationary impact on the Swiss economy. Slowly, the credibility of the SNB is being challenged and the EUR/CHF is hovering above the self-proclaimed MAGINOT LINE.
The market hasn’t frontally assaulted the SNB yet but the fact that it is so close to the level means a test of the SNB’S WILL IS COMING. The next response will be negative interest rates so watch the 90-DAY INTEREST RATES AS THE CANARY IN THE COAL MINE. More importantly, if the EUROPEAN RECESSION IS BEGINNING TO RECEDE, WHY DOESN’T THE EURO BEGIN TO RALLY ON ITS OWN AGAINST THE SWISS, AND, OF COURSE, ALL THE OTHER CURRENCIES.
***Further, yesterday President Sarkozy fired a salvo at the ECB as he voiced his concern that the EUROPEAN BANK should be more concerned with GROWTH rather than solely PRICE STABILITY. This contradicted the support he had shown Chancellor Merkel in the German desire for a restructuring of the PROFLIGATES prior to a full fiscal union. Again, President Sarkozy is in dire straits as he battles to maintain his office.bSunday will provide the first clues as to why Sarkozy is all over the political map as election day nears. Sarkozy has gone from wanting Angel Merkel to actively campaign for him to attacking the entire program put force by the Germans on containing the EURO DEBT CRISIS. The insanity that is European politics!