Profitsee – Future Economic Surivival

Divinations in Forex, Commodities and Economic Patterns

EUR/USD, Citibank, banking, Eastern Europe

From Scotia Capital Global Reasearch 2/23/09

Gains in European equities are helping to keep the momentum moving against the USD in early trading. GBP is the top performer with the aussie and kiwi not too far behind. Only the franc and yen have fallen behind the USD today, reflecting the increased willingness of markets to make more aggressive bets, though it seems that volatility is a bit more elevated within today’s trading ranges for a number of currencies (EUR, CAD, JPY). The news that Citi is in talks with the government for more capital in return for an increased equity stake is helping to provide a bit of a sentiment boost, though it seems a little bit premature as it is unclear whether any such move would leave the bank a private sector entity or whether the government could eventually move to take a greater than 50% stake. The precondition for a US (and global) economic recovery is a return to certainty in banking sector stability, which would be a definite positive market driver. However today’s sentiment boost is based on the assumption that Citi gets more capital without nationalization. Given that incremental steps have repeatedly proven to be a failure in the markets eyes, we’d view the current rally (and USD selling) with at least a little bit of skepticism, and keep in mind that it was last week that equities were taking a throttling due to the notion that the banking sector would indeed need to be temporarily nationalized. More capital for a large US bank doesn’t erase the possibility of a return of the nationalization threat down the road as policy makers may grow tired of steps that run the risk of continued failure (though nationalization is not the desired route in the US). Nevertheless, it is still the financial sector that is driving the market as we begin the week, and positivity runs a little higher than last week. Another major currency market driver in recent sessions, the worries over banking exposures of Western Europe to Central and Eastern Europe, seem to have gone away for the time being as EMEA currencies have all rallied against the USD and EUR, moving away from recent (and in some cases record) peak levels of weakness (most notably HUF and PLN). The easing in the degree of pressure on these currencies is definitely a welcomed event, though again we wonder how long this will last, as all the market received from the larger European economies last week is reassurance over the stability of the Eurozone and some hint that support would be available through certain facilities for struggling EU member states not in the Eurozone. Talk is cheap however, and the proof is in the pudding. While the market is taking its focus off of this problem for the time being, a resurgence in pressure on EMEA currencies will show just how willing Europe is to act and with what kind of firepower. We’d note that the failure to act to help a struggling EU economy that is a prospective Eurozone member would definitely do little for general euro sentiment. Also, the knock-on impact on the Eurozone (and EU) of such a failure could be something very much like allowing another large US banking institutions fail, filled with unpredictable and unintended negative consequences.CAD is quite resilient today, though has given back some of its earlier gains which saw USDCAD trade down to near the 1.2355 level before retracing to around 100 points higher as North America comes online. There is currently a down trend in play for USDCAD over the past four sessions, as last week’s early USD gains are in danger of being completely unwound. Outside of large one day equity driven strengthening moves in USDCAD, consolidation dominated by a

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Geithner’s lack of detail deflate overly-optimistic markets.

This report was prepared by The Bank of Nova Scotia
While many attributed the unfavourable reaction to a lack of detail in Secretary Geithner’s speech, especially as it related to the newly proposed public-private asset purchase scheme, we’d view this reaction as a welcomed and delayed adjustment from the past two sessions of somewhat unfounded optimism. It was strange that, after an absolutely horrible nonfarm payrolls print on Friday, that markets still managed to rally and stay positive on Monday in the hopes that the announcement would bring some sort of game-changing miracle. While we agree that the announcement would have been much better received had it possessed a greater measure of detail, the impact on sentiment would still likely have been short lived as it would have not changed the fact that the proposed measures would not only have taken time to implement, but would have also taken an even greater amount of time before having an impact. Thus we can say that current equity and currency trading levels better reflect economic reality, at least as an adjustment to the high degree of post-nonfarm optimism that has existed over the past couple of sessions. Of course yesterday’s fall would not have seemed so pronounced had expectations been properly aligned. If anyone is to shoulder the blame for this, it would more likely have to fall on the government as the delay in the announcement of the financial stability plan helped to stoke expectations that it was in order to fine tune what would be sweeping and immediate measures. The details given (or lack thereof) suggest that a judgment on how sweeping these measures are will have to be suspended until greater clarity is provided, and it is obvious that there is a great deal less “immediacy” than hoped for. The USD, though surging yesterday, may not see as much support as on previous bouts of risk aversion as this one is more directly tied to factors that impact the health of the US economy. However, equities may once again help to decide the dollar’s ultimate short term performance, and the lack of strong selling today in Europe and the positive (though rapidly deteriorating) open indicated by North American futures may point to the reason why the USD is not better bid at the moment.

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Akmos sentiment indicator in GMT

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