10 May 2010

USDX : Buy on Interest Rate Differential Expectations?

  • EU rescue package : EUR 440 bio bilateral loans from EU countries, 60 bio from EU emergency fund, 220 bio from IMF. More importantly, ECB had "taken a decision to intervene in the secondary market for government securities” ie buy EZ debt. Also USD swap liquidity facilities (Fed, ECB, BOC, BOE, SNB; BOJ considering) reinstated. Together, all these appear sufficient to stabilize markets, at least for now. Durable or not, it is clear that EUR rates will not go up for a long time (austerity measures, fiscal tightening, etc).
  • In contrast, US data on improving trend eg NFP, ISM. ED spreads widened back out to last week's pre-EU panic levels (eg M0/Z0 +35 now, cut loss at +24. Sickening!). Expect the Fed will move to put rates up way ahead of the ECB.
  • Perception of the EUR as a flawed currency/concept (1 currency, 1 central bank interest rate, vastly different economic conditions) will not go away. Am thus still looking to sell EUR; just a question of timing and price level. [Buy Gold, Buy USD, Sell EUR].

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