FOREX TRADING

The Fed Chairman, Ben Bernanke dominated currency trading this week adding risk and trader’s aversion back into the mix. When the Federal Reserve worries in public about the lack of job creation in the United States, and says that “properly executed’ tax cuts can benefit an economy, a policy in direct opposition to the government’s plans, markets begin to doubt the security in their own positive economic judgments. The Fed Chair has always been most circumspect in hi economic assessments, if he is willing to pass comment on current government policy, what fears does he hold if no changes are made in Us economic policy?

In the hour after his congressional testimony at 2:00 pm Easter Time the euro dropped almost a figure against the dollar. If the United States economy is then the rest of the world, including China and Asia is as well. Risk renters the currency market and the dollar is the risk slayer of choice.

After taking the cue from their American regulatory colleagues, the European bureaucrats conducting the bank capital adequacy ratings have relied, as they have said they would, on Europe accounting standards to measure their institutions. The 91 banks being assessed will have to take haircuts on sovereign debt that they own only if it is classified as belonging to their trading portfolios not their investment books. The probably result is that a majority of the outstanding debt of Greece, Ireland Spain Portugal and the rest of Europe, owned by European banks will not have any reductions in value and hence the banks will not incur additional capital requirements.

The stress tests assume losses of 23.1% on Greek debt, 14% on Portuguese bonds, 12.3% on Spanish securities, 5.9% on French and 4.7% on German issues, according to Bloomberg.

The different market reaction to potential further quantitative easing by the Federal Reserve between March 2009 and Wednesday is striking.

Last March 18th when the Fed announced its $300 billion Treasury purchase program in the context of new trillion dollar deficits and the dollar got hammered, losing almost five figures on the day again the euro. But that was then. Trillion dollar deficits have become routine. The administration has planned a decade of such and the market reaction is passé. But worry about the state of the US economy and by default the world recession recovery is the current topic. When the Chairman said that “significant time will be required to restore 8 ½ million jobs”, traders heard economic slowdown and potential quantitative easing, one of the few monetary tools remaining to the Fed. This time mortgage rates and the ten-year Treasury are at or close to historic lows; the markets do not fear the monetization jinn. The last two years have proved that the dollar is the world’s risk destination. If the US economy is headed for a serious trough or recession risk will rise in every market and economy. When risk goes up so does the dollar. The US currency gained almost two figures against the euro in New York afternoon trading once Chairman Bernanke began speaking before Congress.

The EU bank stress tests will satisfy no one. These tests were primarily about sovereign debt. To exclude this debt form the capital adequacy measures, no matter how adverse the supposed ‘stress test’ scenarios are, entirely begs the question. What security is there that Greece of any of the other impaired sovereign will be able to pay these debts at maturity? Holding them as investments is irrevelent. The only measure of the current value of these bonds and sovereign paper is the market judgment upon sale, essentially the haircut applied by the testers themselves. The euro cannot proper until the European banking system takes the full measure of its medicine.

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