Jim Rogers on the EU, the U S election, and the next big investment opportunity

EUR/USD nears 1.28 on ECB bond buying program

FXstreet.com (San Francisco) - The Euro has accelerated in the last hour against the Dollar and following the US employment data the EUR/USD has jumped around 100 pips from 1.2685 to reach highest level since May 22nd at 1.2775. 

http://www.fxstreet.com/news/forex-news/article.aspx?storyid=66e94ca2-c527-48a4-b1f0-65243a38740e

The euro has strengthened to a two-month high against the US dollar, as the European Central Bank's bond-buying plans continued to please the markets...   http://www.bbc.co.uk/news/business-19516323

Since there have been tens of thousands of lawsuits filed internally in Germany with its constitutional court alleging the ESM is illegal, it was only a matter of time before the Germans decided to sue the ECB as well for its "unlimited" bond buying. The time has arrived. From Bloomberg:

• TILLICH SUPPORTS LEGAL STEPS AGAINST ECB BOND BUYING: WELT
• TILLICH SAYS ECB BOND BUYING SIGNALS EFSF, ESM NOT ENOUGH: WELT
• TILLICH: ECB MANDATE SHOULD NOT INCL. UNLIMIT. BOND BUYING:WELT

Perhaps all those rumors of the Bundesbank's death were, as we expected, rather exaggerated.

http://www.zerohedge.com/news/german-state-saxony-supports-legal-action-against-ecb

EUR/CHF breaks away from 1.20 peg

FXstreet.com (Barcelona) - EUR/CHF is currently moving higher printing fresh 3-month highs at 1.2058, last at 1.2054, a +0.36% higher from previous Asia-Pacific open yesterday, on the back of mounting rumors of SNB rising the peg to 1.22 in the first place.

According to Commerzbank's strategist Peter Kinsella , as reported by Clare Connaghan for DowJones: "ECB bond purchasing basically removes tail risk of a euro-zone breakup," the analyst says, as reflection of previous Franc strength based on fears of a euro area breakup. Rising the peg could bring many positive effects for Switzerland, but according to Citi, it could also bring extra risks as the foreign currency reserves might reach as high as 100% of its GDP, making the country very vulnerable to Euro exposure in case can't be able to sustain the peg, reported Ira Iosebashvili for DowJones.

Immediate resistance to the upside for EUR/CHF comes at recent session and 3-month highs at 1.2058, followed by March 27 highs at 1.2069, and May 24 highs at 1.2075. For the downside, nearest term support shows at yesterday's highs 1.2046, followed by Feb 27 lows/June 29 highs at 1.2038, and Aug 02 highs at 1.2029.

http://www.fxstreet.com/news/forex-news/article.aspx?storyid=ebaa98d8-19b6-43dd-93dc-e6df7b16733f

http://seekingalpha.com/article/816681-is-the-snb-going-to-unpeg-the-eur-chf

EES: Europe's problems much deeper than Euro currency

While traders are bearish on the euro we need to remember the greater context of Europe and the origins of the euro currency. The euro as an economic union was built on a similar U.S. model, that of a Federal State comprised of individual "united" states. However, Europe is much different than the U.S. historically, demographically, and geopolitically.

http://seekingalpha.com/article/845531-europe-s-crisis-much-deeper-than-euro-currency

Moody’s Changes Euro Zone Rating Outlook to ‘Negative’

Moody's Investors Service has changed its outlook on the Aaa rating of the European Union to “negative,” warning it might downgrade the bloc if it decides to cut the ratings on the EU's four biggest budget backers: Germany, France, the U.K., and the Netherlands.

http://www.cnbc.com/id/48888752

Spaniards Pull Out Their Cash and Get Out of Spain

After working six years as a senior executive for a multinational payroll-processing company in Barcelona, Spain, Mr. Vildosola is cutting his professional and financial ties with his troubled homeland. He has moved his family to a village near Cambridge, England, where he will take the reins at a small software company, and he has transferred his savings from Spanish banks to British banks.

“The macro situation in Spain is getting worse and worse,” Mr. Vildosola, 38, said last week just hours before boarding a plane to London with his wife and two small children. “There is just too much risk. Spain is going to be next after Greece, and I just don’t want to end up holding devalued pesetas.”

http://www.cnbc.com/id/48889555

Eurozone manufacturing PMI falls again in August

Manufacturing output across the 17-country eurozone shrank again in August, according to a widely-watched survey.

The Purchasing Managers Index (PMI) showed the region's manufacturing sector contracted despite factories cutting prices.

Markit's final PMI was 45.1, above July's three-year low of 44.0.

However, the figure was the 13th month in a row that it was below the 50 mark that indicates growth.

The latest figures from China showed its manufacturing activity fell, too, to a nine-month low in August, adding to fears that its economy is slowing faster than estimated.

China's PMI fell to 49.2, the lowest reading since November 2011.

Meanwhile, in the UK, the downturn in manufacturing unexpectedly eased last month as domestic orders boosted output, with its PMI rising to a four-month high of 49.5 in August from a downwardly revised 45.2 in July.

http://www.bbc.co.uk/news/business-19462611?print=true

Brussels pushes for ECB supervision of eurozone banks

All banks in the eurozone would be supervised directly by the European Central Bank in Frankfurt under new EU proposals to be unveiled next month. The European Commission wants to create a single supervisory mechanism for the 6,000 banks, with the ECB at its heart. It would replace the current system of national regulators supervising banks. But it requires EU leaders' approval. In many cases the national authorities failed to foresee and deal with banks that got into funding difficulties. The banks then needed to be bailed out by national governments. This in turn increased the pressure on public finances. The Commission proposals form a crucial part of the plans being worked on to help stabilise the single currency, and to avoid a repetition of the current chronic debt problems damaging public finances across the region. Officials hope it could be in place by early next year. It is one step towards creating a genuine banking union for the euro. Policy makers say such a union is necessary to help convince markets that mechanisms are in place to safeguard the single currency's future.

 http://www.bbc.co.uk/news/world-europe-19438439?print=true

World hyperinflations: A paper

Hyperinflation s

Stronger Yen forces Japan to export to itself

Japan Inc. has a new export market: Japan.

For the first time, companies including Nissan Motor Co. (7201) are building products abroad to ship home as a stronger yen, aging workforce and improved skills overseas erode a century-old mantra that what’s sold in Japan should be made there.

Nissan’s decision to import foreign-made vehicles in 2010 paved the way for some of Japan’s biggest companies, including cosmetics company Shiseido Co. (4911) and electronics maker Toshiba Corp. (6502) Shipments home from Japanese producers’ overseas plants have more than doubled in a decade to a record, including a 31 percent jump in the past two years, compared with a 61 percent gain in total importsover the 10 years, government data show.

“Nissan’s decision was epochal,” said Masato Sase, an auto-industry analyst and partner at Deloitte Tohmatsu Consulting Co. in Tokyo. “Before then there was a tacit assumption that cars sold in Japan would be made in Japan.”

The shift reflects one of the biggest departures from an industrial strategy begun by the Meiji leaders who ousted the last shogun in 1868 and set up western-style factories. A “made by Japan” model, where manufacturers base operations with less regard to nationalism, may boost corporate competitiveness at the cost of jobs in the world’s third-biggest economy, deepening deflation pressures.

“People see the sale of cars made abroad as a sign of the times, as globalization,” said Shiro Kakinuma, a salesman at Taiyo Nissan Auto Sales Co.’s Shibaura Chuo showroom in Tokyo, which offers the Thai-made Nissan March subcompact. “When the new March came out there were some articles questioning the quality of a car made in a developing country. Not anymore.”

http://www.bloomberg.com/news/2012-08-29/nissan-ships-cars-home-as-yen-erodes-century-of-made-in-japan.html

EES: Building Forex Systems in September S & C

system developers know, the process of building automated trading systems is complex and filled with biases. A machine is not necessarily a physical mechanical machine. It can be a virtual machine, electrical machine, or in our case, software-based logical trading machine. System trading is the process of building and implementation of algorithm-based systems that execute trades automatically. While many associate this with machine intelligence, only the execution is fully automated.

http://www.traders.com/index.php/sac-magazine/current-contents/feature-articles/54-trading-systems/1721-building-systems-for-forex

EES featured in September Stocks & Commodities magazine

EES: September Global Markets Events

Don't allow the low volatility in August to make you complacent.

Most of the world is on vacation, even in the hard working United States. Kids are off from school, some hedge funds even shut down in August. Those who aren't on vacation, use this as a quiet time for planning so they are ready for a big September.

Read More:
http://seekingalpha.com/article/833991-september-global-markets-events

BofA: 'CODE RED ... RISK OF SELL-OFF IS HIGH'

Yesterday, BofA's top North America economist Ethan Harris penned a bearish note on the the U.S. economy, writing that it "is in the eye of the storm" and that a number of troubling headwinds loom on the horizon.

BofA strategists Arjun Mehra and Cheryl Rowan have a warning more precisely aimed at the stock market. In a note to clients entitled Code Red, Mehra and Rowan claim there is "limited upside from here" and the "risk of a sell-off is high."

Read more: http://www.businessinsider.com/bofa-code-red-risk-of-a-sell-off-is-high-2012-8#ixzz24neMVVRq

Forex Liquidity

Peter from Ireland wrote in asking me to do a piece on liquidity on the forex market. Although the market trades 5 trillion dollars per day in volume, even forex traders face limitations in how much volume they can push through in a short period of time.

A Zero Hedge article on the Reuters 3000 platform outage cited some interesting statistics for the currency markets and where the trading actually occurs. Although I was familiar with Reuters and EBS previously, the Dow Jones article was the first place where I've seen volume statistics published. Apparently Reuters, the biggest platform, trades approximately $130 billion dollars in volume per day.


That's an astronomical amount of money. Intuition makes it feel like hitting the ceiling on executing large transactions might be a problem for only the biggest institutions. Let's take a look at where we might expect to run into problems.

When I went through broker training at FXCM, the team leader cited the EUR and USD as being involved with 60% of all forex trading volume. That number does not imply how much volume occurs in the specific EURUSD pair. Also, that that was seven years ago. I dug around looking for more up to date numbers. Forex trading volume is notoriously hard to track due to it being an over the counter market. The best proxy that I know of is the FX futures market.

The CME publishes FX futures contracts volume (page 16), which I used to estimate the proportion of the EURUSD pair in relation to all traded volume. FX futures contracts, like their spot counterparts,  are all denominated in different currencies. Except for the e-mini and e-micro contracts, which resemble the mini lots of retail forex trading, the contract size is roughly $150,000. I'm counting contracts rather than actual notional value to speed up the calculations. You can double check my calculations by downloading this spreadsheet. The EURUSD pair represents 33% of all forex trading volume based on my rough estimates.

The EURUSD value traded per day on Reuters is 33% of $130 billion, which is 43.33 billion. The average trading consists of 1,440 minutes per day. 43.33 billion trades per day / 1,440 minutes per day yields an average traded amount of $30,092,592 traded per minute. Again, this is a huge number.
Everyone in forex trades on margin. Institutions traditionally keep their margin very low. Assume that 3:1 is the norm for the big players. That means that the actual funding in the account only needs to be $10 million dollars (30/3). That's a lot of money, but that is chump change by institutional standards. That's more on par with a wet behind the ears CTA that launched within the past few years. This scenario is for the most liquid currency pair on the largest currency trading platform in the world.

Dropping down to the retail scenario, the numbers involved get much, much smaller. The Financial Times cites FXCM's average trading volume as $55 billion per day. This is tens of multiples higher than an average broker's volume. I picked it because it's the highest that I know of and I wanted to demonstrate a big scenario. 33% of $55 billion is $18.15 billion traded on the EURUSD. $18.15 billion / 1,440 minutes per day is $12.6 million traded per minute.

Retail traders leverage far higher than institutions. Again, let's be kind and make the assumption that the average retail trader employes 15:1 leverage on the account (hint: it's much higher). $12.6 million / 15 implies that it only takes an account balance of $840,277 to trade all of the expected trading volume in an average minute. One trader is unlikely to have a balance that large, but a segment of a broker's customers most certainly do.

The fragmentation of the market combined with leverage makes it strikingly easy for a group of traders to suck up all of the liquidity available on a given platform. Even though trillions are available across the broader market, the broker or platform where a trader participates is substantially more limited. The scenarios modeled use the EURUSD, the most liquid pair in the world. Liquidity gets exponentially worse when examining exotics or cross currencies. The volumes are far lower, but the available leverage and account balances remain the same.

When too many traders buy the same EA, all orders fire off at the same time. Blockbuster EAs easily reach the combined account equity floor where demand overwhelms supply. Finer details like all of the supply is being one sided make the situation all the worse.

EES: Sell Euro on Spikes

Based on an overwhelming bearish negative bias on the euro (FXE) from multiple sources (individuals, banks, analysts, and fund managers) we believe selling the euro on any run-up is a viable strategy.

http://seekingalpha.com/article/830411-sell-the-euro-on-spikes