Why “Energy Rebalancing” Means Huge Profits This Year

by Dr. Kent Moors 

Marina and I have a little less than a week left on the island before we head back to the mainland. I hope our pipes haven’t frozen back in Pittsburgh!

As we head home to begin the New Year, there are several new wrinkles in the energy market that I have my eye on.
And as always, I’m looking for new ways to profit from them.
These new wrinkles revolve around what I call the “energy balance” – and its changing fast.
It involves big shifts in sourcing and systems that will combine with some major revisions in finance that will alter the landscape for investors.
It’s not about new energy breakthroughs or big oil discoveries. And it’s certainly not about entirely new structures.
Rather, it’s about the accelerating changes in elements you’re familiar with.
Think of it, if you will, as a “rebalancing” of what already exists.
It’s an unstoppable trend that promises to hand us huge profits…

The 2014 Plan: Leveraging a Gigantic Advantage

For us, of course, this “rebalancing” gives us a gigantic advantage: we identified this trend a long time ago. In fact, I’ve discussed it in these pages before.
At present, there are three overarching dimensions to these changes: the energy network itself, the geographical considerations, and the financial arrangements.
As as the market rebalances, it will require we change our investment strategy to profit from it -especially the with first two.
As for the third, we have just about single-handedly revised the approach to finance all by ourselves.
Today, however, I want to talk about the networking dimension.

Networking involves the entire sequence of energy (oil, natural gas, electricity) transmission from production, through gathering and transit, to refining, distribution and retail. This remains the upstream-midstream-downstream sequence that has become a mainstay of the energy sector.
In the case of operating companies, our target interests will consider the basins worked, the company’s focus, market cap and field size, along with the more or less traditional considerations of management style, balance sheet, and market position.
We will also see some interesting rebalancing in the refinery space, as those processors able to bridge the domestic market and rising oil product exports, as well as the conventional/unconventional sourcing mix, will have a substantial advantage.
And then there are the huge transport revisions that are on the way. We have talked about two of these primary developments before, but will be watching their progress with added interest this year.

Fundamental Changes = Big Opportunities

The first is the fundamental change in the worldwide balance occasioned by the rapid expansion of the liquefied natural gas (LNG) market.
This remains the single most significant revision globally to take place over the next decade. The rise of LNG exports from the U.S., fueled by the largess of shale and other unconventional gas sources, will be fundamental to this revolution.
On the other hand, there is another revision that may be just as significant in generating investor profits from the export trade.
I’m referring to crude oil, but with some new elements contributing to another change in the balance. I’m talking about oil exports.
In the future, we will see a concerted move to export oil in new directions – starting with transit from the U.S. For some time, exporting oil from the states has been considered a national security issue, making the trade very difficult.
In this case, two exceptions have been allowed: one permitting the export of heavy, lower quality crude from California (for which the argument can be made of an insufficient domestic demand); the other allowing certain tolling contracts.
Tolling is a process whereby raw materials are exported to be processed abroad with the finished product then imported back in. The justification for this allowance has been the concern over maintaining sufficient domestic stock of oil products, especially diesel. That concern has now abated with the advent of significant reserves of tight oil (“shale” oil actually being only one category of such unconventional sourcing).
None of this would have been considered possible only a few years ago. Being dependent on imported oil, American policy makers were understandably dismissive about allowing the export of finished products from U.S. refineries.
But not any longer…
As is the case with natural gas and LNG, there is now ample local supply. That opens up the market for rising oil product exports.
As a result, I suspect that tolling will rise again – owing to the limitations on overall U.S. refinery capacity – but will increasingly service a jump in the exports of those products. The cost differential in utilizing foreign processing facilities makes this approach quite profitable.

The Big (And Profitable) Global Changes Ahead

Then there is the expanded use of the completed East Siberia-Pacific Ocean (ESPO) pipeline in Russia.
An earlier spur from ESPO has for several years moved oil south to China. But the new impact of the pipeline on wider Asian demand will become far more pronounced.
ESPO export oil will become a new benchmark crude rate, a major development for all of Asia. As this develops, the ESPO benchmark will replace London’s Brent as the standard for trade in wide portions of that market.
This is what makes this so significant. End users in Asia have paid a premium over what it costs to buy the same quality oil for delivery to Europe. ESPO will undercut that tradeoff and provide a genuine boost to Asian economic development. ESPO oil has a lower sulfur content as well meaning it is “sweeter” than Saudi export. That is another big advantage for Asia.
Other export changes will come from a number of geographic market-specific revisions. Western Europe will be importing more LNG as nations like Germany also phase in a wider usage of renewables.
These LNG imports will add pressure on the pricing points for long-term pipelined gas contracts, while improving prospects for investments in the expanded liquefied trade.
What’s more, a matter I have addressed before and had meetings about over the last several weeks, has begun to change how people view oil and gas sourcing in the Caribbean.
It involves the emergence of China as a major conduit of energy funding in South America and the rapidly accelerating networking of production, refining, and transport throughout northern South America and the Caribbean basin.
The combination rising Chinese influence and an existing system called “Petrocaribe” will produce some major changes that will impact North American markets. 

Thomas Edison's secret war with the Federal Reserve decades back has led to a new currency rising up today. It threatens the dollar, EURO, Pound, and the entire international monetary system. But it's also making everyday Americans rich. A Silicon Valley venture capital veteran investigates this exciting phenomenon.

Warren Buffett on Gold vs. Hommel on Gold!

Warren Buffet explained why he does not see the value in gold in his annual report from 2011.
http://www.berkshirehathaway.com/letters/2011ltr.pdf
 
http://ivanhoff.com/2013/04/15/warren-buffett-on-gold/
 
It was republished by ivanhoff, and came to my attention last week, which gave me this occasion to respond.   Here I go.

Buffett:
The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.

Hommel:
Buffett is claiming that Gold's value exists only because other people will buy it.  True.  True of all assets.  And this is exactly why gold is a good thing, because of all things, gold is most likely to be valuable in more places to more people than nearly any other item that you can consider, precisely because it is money.  But Buffett presents this as a bad thing, calling gold "unproductive".  Well, let's see, how is gold productive?  It can go up in value, just like stocks or bonds or housing, or any other asset.  People recognize that gold has value not because it gains value, but because it does not decay or rot or go bad.  Food makes a horrible form of money, partly because it goes bad.  One of the longest lasting kinds of food is the wheat kernel, which can last up to twenty years.  Gold lasts 6000 years, with no decay.

Buffett:
This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further.  Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.

Hommel:  True, gold buyers do not buy gold for what gold will produce, but most of my gold buyers are buying gold because they do believe it will go up in value, because they do believe that others will see what they can see, that gold is special, and cannot be printed to excess like paper money is being created to excess these days.  Gold buyers buy gold also because they recognize that gold does not decay, because it has a very high value for the weight and density which makes it portable, and because it can be hidden.

Buffett:  The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

Hommel:  True, gold is not procreative.  But this does not mean that gold cannot go up in value.  Gold does have a use.  The use is as a store of value.  The use is to communicate value over time.  Gold has three primary uses: as a store of value, as a unit of account, and as a medium of exchange.  These days, it is not used much as a medium of exchange, because no government on earth is issuing gold as circulating currency, but because all nations issue paper money.  This is making gold an excellent store of value, because gold is increasing in value more than all the paper money being continually printed.  The key use of gold in our times is not only in that it holds value, but gains value.  This is because the new supply of gold is far less than demand.  The world prints nearly $5 to $10 trillion worth of paper money per year, which is $5,000 to $10,000 billion.  In contrast, the world mines about 83 million ounces of new gold, at $1334/oz, is worth only a mere $111 billion.  Clearly, there will be more and more buyers of gold in the near and far future.

Buffett:  What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.

Hommel:  Gold buyers are derided as "fearful" by Buffett.  And he notes this has recently been correct.  But also wise.  He could have written, "The ranks of the wise will grow".  Perhaps more apt.

Buffett:  Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.”

Hommel:  True, bubbles happened in stocks and houses.  And probably still are in a bubble.  Is gold in a bubble?  When less than $100 billion is being mined each year?  I think not.  His buddy Bill Gates could buy half the world's annual gold production, and would probably become a lot more wealthy if he tried.  I say tried, because there is no way he would succeed, because his stock is not liquid enough to sell that much, and the gold market is too tight to buy half the gold market without pushing the gold price up, too.  My point is that the gold market boom is still in the beginning stages. 

Buffett:  Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.

Hommel:  Today, one to two years later, gold prices are down to $1335.  Buffet was right for one year out of a thirteen year bull market in gold.  Buffett will likely be wrong next year.  But 170,000 metric tonnes at $1335/oz. is x 32,151 oz/tonne is $7.3 trillion today. 
The tiny size of the cube of gold in pile A also explains why gold is valuable.  It contains a lot of value in a small space, making it very portable.  Some people wonder why gold should be any different than copper or any other metal, asserting that the other metals could be used just as easily as silver and gold.  Really?  Well, I have a 33 kilo block of copper that cost about $300, about the same as a ten oz. bar of silver.  Which would you rather carry to the grocery store?  Also, the copper has a spread on it to buy and sell of over 50%.  Or, would you prefer a quarter oz. of gold for about $330?

Buffett:  Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Hommel:  Can you imagine an investor with $7.3 trillion to begin with?  There are no investors who are worth so much, are there Mr. Buffett?  Besides, even if there were, there is no evidence that the entire world supply of gold is being all offered at the current asking price for gold.  The vast majority of gold does not trade each year.  World annual mine supply ads only about 1.5% to the pile per year.  Well, let's calculate it.  http://www.goldsheetlinks.com/production2.htm  170,000 tonnes in existing stock.  World annual production about 2600 tonnes.  1.529%.  Yup, still the same after all these years.
But Buffett's point is that he cannot imagine any investor buying the gold instead of the farmland and oil companies.  But let's compare more clearly, $40 billion x 16  Exxon Mobils is $640 billion, plus the $200 billion from crops, which means the oil companies and land produce about $840 billion.  Well, how much does the pile of the world's gold produce?  Gold is likely to exceed $1900 in the next year or two, from $1336 today.  As it does, the pile of gold will go up from $7.3 trillion to $10.4 trillion.  Now let's compare shall we?  $640 billion gain in the oil companies, and $3.1 trillion, or $3100 billion in the gold pile.   I think I've made my point, but let me go further.  In actual fact, 16 Exxon Mobils don't exist.  It's a pure fantasy choice, as in, "not real".  The gold is real.  That makes the gold choice not only several times better, but infinitely better, doesn't it?

Buffett:  Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion.  Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.

Hommel:  As we have seen, the existing annual production of gold is now $111 billion, and being purchased not by "frightened individuals, or speculators", but by "wise investors," and even central banks now!  And again, with $5000 to $10,000 billion dollars worth of currency being printed world wide, I think the new gold will have plenty of ready buyers for decades to come.  In fact, Gold is acting not only as a value preserver, but value gainer, for those investors who don't want be robbed by governments.

Buffett:  A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Hommel:  I'd wager that a century from now, none of the world's currencies today will have any value at all, but the gold still will.  Gold is not a choice between oil and gold, it's a choice between paper money and gold.  No investor will ever go out and buy 100 barrels of oil at $103/barrel to store on his lawn, to preserve $10,000 worth of paper money value, because the oil is extraordinarily inconvenient, and expensive to store and ship for the relative value.  But anyone can buy 7 gold eagles that will fit into the palm of your hand for $10,000, which takes up about 1/10th of the space as a stack of 100 of the $100 bills.

Buffett: Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

Hommel:  In contrast, I'm supremely confident that the world's pile of gold will increase in value far faster than oil.  The reason is that gold has been money for about 6000 years of human history, and mankind has only been using oil for about 160 years or so.  Furthermore, the world's bankers began attacking gold as money about that far back, so the world has never had a good historical gold to oil ratio in place during a time when the world used gold as money!  Therefore, we have to use intuition to determine a proper value for gold as compared to oil, assuming the world returned to using gold as money, and it probably will.  I would supsect that the world's gold production should be valued more than the world's oil production, because the world'd gold production must be spend on more than "just oil".  As it is, oil is no more than 5-10% of the world's economy, but let's assume oil were as much as 50%.  Well, then, the world's gold production would be worth about twice as much as world oil production, because people would need some gold left over to buy everything else.  That would assume a value for gold as follows:
World annual oil production is about 90 million barrels per day.
x 365 days/year x $100/barrel =
That's about $3.3 trillion per year in dollar value, of oil production.
If world gold production of 83.5 million oz. were worth $6.6 trillion per year, that divides out to $79,000 per oz. for gold!
Oh yes, in the last five years, gold and silver have solidly outperformed Birkshire Hathaway stock.
http://finance.yahoo.com/q/bc?t=5y&s=BRK-A&l=on&z=l&q=l&c=slv%2C+gld&ql=1
And I suppose gold and silver have significantly outperformed BRK in the last 13 years.
https://www.google.com/#q=brk.b
Since the year 2000, BRK.B has gone from $40 to $114, an increase of 2.85 times.
Since the year 2000, Gold has gone from $255 to $1314, an increase of 5.1 times.



I strongly advise you to take possession of real gold and silver, at anywhere near today's prices, while you still can.   The fundamentals indicate rising prices for decades to come, and a major price spike can happen at any time.

Please note our new shorter hours, I'm working in each shop every other day.

JH MINT in Grass Valley
Open 11AM to 4PM Pacific Time, Monday, Wednesday, Friday.
Closed Tuesday, Thursday, weekends and bank holidays.  (Also Closed from Dec. 25th to Jan 1st)
13241 Grass Valley Ave
Grass Valley, CA 95945
 (530) 273-8175 
www.jhmint.com

Greece: A Gathering Storm Threatens Europe and America

Greece: A Gathering Storm Threatens Europe and America

By Elliott Wave International/the Socionomics Institute

The similarities between Greece and pre-WWII Germany are striking.

• Nazi salutes.
• Praise for Adolf Hitler.
• Swastika-like banners.

Now, before you write off this warning as a run-of-the-mill, Nazi-name-dropping scare tactic, consider this recent report from the Socionomics Institute, a U.S.-based think tank that studies global trends in social mood. Here's an excerpt from the Institute's February publication of The Socionomist.

A rising political party known as Golden Dawn is resurrecting such practices, all hallmarks of Hitler's Third Reich, in modern-day Greece, which has suffered a dramatic, five-year stock market decline.
From 1927 to 1932, Germany suffered a disastrous stock market decline, falling 73% over five years. Six million people were unemployed, and the government was weak. Germany suffered outside financial pressure in the form of reparations required by the Versailles Treaty and consequences of its involvement in World War I.
Adolf Hitler argued that the German government betrayed its people by signing the Versailles Treaty. He promised that if he were elected, the nation would stop paying the reparations. The position appealed to the German people's anger and helped the Nazi leader become chancellor in January 1933.
Modern-day Greece has experienced an even larger five-year decline than 1920s-1930s Germany did, falling 88% since 2007, and the country has suffered a debt crisis. As a condition for bailouts aimed at helping Greece recover, the European Union has imposed tough austerity measures. The Greek government has implemented the measures. Meanwhile, the deepening negative social mood has fueled protests against them.
Nikos Zydakis, editor of the daily newspaper Kathimerini, says Greece is in an economic depression like that experienced by Germany in the 1930s. More than 90% of Greek households have experienced income reductions, with the average drop 38%. Unemployment in Greece now stands at a record 26.8% and is nearly 60% among Greece's young adults. In November the Greek Parliament imposed tax hikes and spending cuts demanded by creditors. Supermarket sales in the country declined by 500 million euros ($669 million) last year, and people are burning wood because the price of electricity has risen and taxes on heating oil have increased.

"History doesn't repeat itself, but it does rhyme," goes an old saying attributed to American author Mark Twain. And new research from the Socionomics Institute sees a disturbing pattern of rhymes between modern-day Greece and pre-WWII Germany.
To be sure, market and political developments in Greece will have a significant impact on the future of Europe, the Americas and beyond.

---

The Socionomics Institute is an independent research firm devoted to the study of social mood and social action. As a partner to the world's largest market forecasting firm, Elliott Wave International, the Institute puts the most important developing social trends around the world into context with Robert Prechter's socionomic theory, which posits that social mood drives social action (not the other way around). Read the rest the Institute's new February report to learn more about the developing threats out of Greece. The full report is available for free as part of a special promotion run by the Institute with EWI. Follow this link to read the full February issue of The Socionomist (a $19 value) - for free.

Gold's Schizophrenia: Pulled Apart By Commodity And Safe Haven Status

Agustino Fontevecchia

www.forbes.com

Gold appears to have entered a new phase, acting as a hybrid, sometimes sympathizing with risk assets and other times acting like a safe haven, UBS' Edel Tully explains. While this makes it incredibly difficult to trade the yellow metal, the gold strategist remains bullish.

After falling about $20 on Tuesday in response to a stronger dollar, gold recovered its footing on Tuesday, hitting $1,693.90 an ounce, its highest level in two weeks. By 1:25 PM in New York, the yellow metal had given up some of those gains and was trading up $19.50 or 1.17% to $1,679.20 an ounce.

Gold's relentless climb, when any and all headlines seemed to fuel the precious metal's bull run, came to an end after peaking above $1,920 an ounce last August, falling almost 20% in a few weeks to bottom out around $1,562.

Still, the yellow metal remains up about 20% this year and most analysts remain bullish. It's as hard to explain gold's skyrocketing rise as it is its precipitous fall; UBS strategist Edel Tully notes gold is now behaving like a hybrid, acting as commodity or safe haven as investors try to find balance amid opposing forces.

Tully had said she expects gold to hit $1,920 in a month and $2,100 in three months, but recognizes gold's safe haven't status isn't keeping it afloat anymore. "Trading the yellow metal [has become] very challenging, as while one can have a view on an event such as US payrolls for example, deciphering how gold reacts has become a lot more difficult. And while buyers are nimbly returning, it is no surprise that there is caution given the struggle for conviction."

Regardless, gold will continue to react to macroeconomic news, particularly in Europe. While the yellow metal barely flinched in reaction to Slovakia's failure to ratify the EFSF (markets appear to factor in a positive vote sometime this week), the Merkel-Sarkozy "comprehensive package" could be setting investors up for a big disappointment, Tully says. "And considering how gold has been behaving recently, market reaction to euro-negative developments will not be as straightforward as it has been historically."

Gold miners have been an alternative to holding physical gold, either via an ETF or through the physical metal. Miners continue to under perform bullion, though, with the Market Vectors Gold Miners ETF flat in the last three months compared with a 5% gain for the GLD gold ETF. Barrick Gold, GoldCorp, and Freeport McMoran are among some of the underperformers within the mining group.

Daily Report: Risk Appetite Continues on European Optimism, But Losing Momentum

Risk appetite continued on optimism on European bank recapitalization plan. European Commission president Jose Manuel Barroso presented a "comprehensive package" yesterday and urged immediate actions from European policymakers to resolve the current crisis. The recommendations include "decisive action" on Greece including the next tranche of bailout fund and a second "adjustment program" with private sector involvement. Banks should be strengthened "urgently" as sovereign contagion and banks are now "linked". Barroso also called for another assessment of the banking system and "fast track" policies of enhancing stability and recovery in Europe. Finally, Barroso said European Union should complete the "monetary union with a real economic union". Also, markets are also hopeful that Slovakia will finally become the last country in Eurozone to approve the EFSF expansion today or tomorrow. The opposition party made an agreement with parties in departing the Slovak coalition that they'll vote to pass through the EFSF expansion in exchange for early elections in March.

Some new information was delivered in the September FOMC minutes published overnight. First, most policymakers lowered their forecasts for the rest of 2011 and 2012. Yet, recession is not their concerns. Second, most members saw advantages in improving communication regarding the goals for inflation and unemployment. However, there were concerns about a proper mechanism to avoid misunderstanding. Moreover, 3 policy options for managing the size and composition of the System Open Market Account (SOMA) were discussed during the meeting: a reinvestment maturity extension program, a SOMA portfolio maturity extension program, and a large-scale asset purchase program. While the second option, known as operation twist, has been chosen, 2 members favored stronger action while 3 members dissented to take additional accommodation'.

On the data front, New Zealand business manufacturing index dropped to 50.8 in September. Japan Tertiary industry index dropped -0.2% mom in August. China trade surplus narrowed to USD 14.5b in September. Australian job market expanded more than expected by 20.4k in September while unemployment rate dropped to 5.2%. Swiss PPI, UK trade balance, Canada trade balance, US trade balance and jobless claims will be released later today.

While risk appetite extends further this week, note that DOW is starting to lose some momentum ahead of 11716/11862 resistance zone. We'd be cautious on reversal signal with focus on 11261 minor support. Break of which will at least trigger a pull back, with prospect of near term reversal for a test on recent low at 10400. Dollar index 

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.9945; (P) 1.0076; (R1) 1.0286; 

AUD/USD rises further to as high as 1.0232 so far today and intraday bias remains on the upside for near term channel resistance (now at 1.0412). Sustained break there will pave the way for 1.0764 resistance and above in near term. On the downside, below 1.0104 minor support will turn bias neutral and bring consolidations. But another rise will remain in favor as long as 0.9865 support holds. However, break of 0.9865 will suggest that rebound from 0.9387 has completed and will bring retest of this support.

In the bigger picture, focus remains on 0.9404 key support level. As long as this support holds, price actions from 1.1079 is treated as a correction, or part of a consolidation pattern to the up trend from 0.6008 only. And, in such case, AUD/USD should still made another high above 1.1079 before forming an important top. However, sustained break of 0.9404 will indicate that rise from 0.6008 is already finished and would possibly bring deeper fall towards 61.8% retracement of 0.6006 to 1.1079 at 0.7945.

Daily Report: Euro Rebound Stalls on Slovakia, Weakness Limited

Euro's rebound against dollar and yen stalled after Slovakia parliament rejected the expansion of the EFSF. The country failed to pass the plan with 55 lawmakers voting for the measure, 9 against it and 60 abstaining. The expanded EFSF plan will increase the size of the facility from 440B euro to 780B euro and Slovakia will be required to contribute roughly 10B euro in debt guarantees. It's reported that the junior ruling coalition Freedom and Solidarity party, one of the four parties in the coalition, has refused to participate in the vote, making the final result hardly a majority. Slovakia is the only country in the seventeen-nation Eurozone that has not yet ratified the beefed-up plan agreed in July. Nevertheless, the negative impact on Euro and market sentiments in general is limited. That's because firstly, Slovakia is expected to pass the re-vote later this week as the government resigned. Secondly, investor's main focus remain on the bank recapitalization plan led by Germany and France that's to be finalized later this month.

Greece is set to receive the EUR 8b tranche of bailout fund as troika, the inspection team of EU, IMF and ECB, said the country has made "important progress" in fiscal consolidation after completing the review. The fund would likely be approved by EU finance ministers later this month and made available to Greece in early November. Though. troika also note that Greece will miss its 2011 deficit target and it's "essential that the authorities put more emphasis on structural reforms in the public sector and the economy more broadly". And, it stressed that "the success of the program continues to depend on mobilizing adequate financing from private sector involvement and the official sector".

In US, the Senate passed a bill to punish China for currency manipulations by 53-35 vote. While the bill doesn't specifically talk about China, it allows the Treasury to label a country's currency misaligned and thus impose tariffs on its imports to make up the currency under-valuation. China responded by claiming that the so called currency misalignment is "protectionism" and a serious violation of WTO rules. The were also criticism from US that the bill could eventually hurt US companies in China's markets, which is a rate bright spot for in the global economy. Nevertheless, note that the bill might not become law easily for the lack of support in the lower House.

On the data front, Australia Westpac consumer confidence rose 0.4% in October, home loans rose 1.2% in August. UK job data is the main focus in European session and is expected to show 24k rise in claimant counts while unemployment rate is expected to rise to 8.0%. Eurozone industrial production and Canada new housing price index will be released too. FOMC minutes from September meeting will also be released and should show the details of the discussion on Fed's operation twist move.

Dollar index tried to draw some support from 77.30 and recovered this week. But recovery is so far very weak and fall from 79.838 is in much favor to extend. 77.30 would likely be taken out later this week and the pull back from 79.838 should extend to 55 days EMA (now at 76.575) and below. But strong support should be seen at around 76.06 to bring near term rebound to extend the consolidation pattern from 79.838.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 104.06; (P) 104.48; (R1) 104.94;

EUR/JPY's rebound stalled after breaching 104.92 resistance briefly and with 4 hours MACD crossed below signal line, intraday bias is turned neutral. Nevertheless, another rise remains in favor with 102.54 minor support intact. Above 104.98 will extend the rebound from 100.74 short term bottom towards 38.2% retracement of 117.74 to 100.74 at 107.23. On the downside, below 102.54 will indicate that rebound from 100.74 is finished and would flip bias back to the downside for retesting 100.74.

In the bigger picture, whole down trend from 2008 high of 169.96 is still in progress and is building up downside momentum again. Sustained trading below 100 psychological level should pave the way to 100% projection of 139.21 to 105.42 from 123.31 at 89.52, which is close to 88.96 all time low. On the upside, break of 111.93 resistance is needed to be the first signal of medium term reversal. Otherwise, we'll stay bearish. 

Q4 FX Outlook: USD Rally to Extend

Waiting for a US dollar rally this year has felt like Waiting for Godot at times as we anticipated one for a long time before the greenback finally rallied sharply in late August and early September after a long period of stagnation over the summer, despite a number of market developments that have normally proven positive for the currency in the past. Those included falling equity markets, rising signs of worry in other risk indicators and in global growth concerns, particularly in Asia and emerging markets.

In our Q3 FX outlook, we discussed the “ugly horse-race” among the G-10 currencies because we felt that few if any of the major or minor developed economies would offer compelling reasons to buy their currencies and that it would be a question of which currencies appeared the least hobbled by fundamentals. The basic outlines of such a development have come to pass, though the USD was very slow to begin rallying as economic data out of the U.S. was terrible as well. But, the relative slowing in other economies and thus a tightening in interest rate spreads was indeed a positive driver for the eventual USD rally. And because U.S. rates were already so low, the tightening has even occurred despite Federal Reserve Chairman Ben Bernanke’s promise to keep the monetary pedal to the metal on low rates until at least mid 2013 – and despite hints that QE3 in some shape or form is on the way. To take the most pronounced example of falling yield spreads, the highest yielding currency among the G-10, the Australian dollar (overnight rate at 4.75 percent as of mid-September) saw its 2-year government bond yields drop from 4.75 percent at the beginning of Q3 to about 3.50 percent by mid-September, a 125-bp drop as compared with a drop in US 2-year rates of a mere 25 bps or so in the same time frame.

We suspect a further tightening in yield spreads between the USD and other currencies will continue to unwind the carry advantage built up against the USD last year and at the beginning of 2011 as economies around the world, particularly in Europe and to some degree in Asia and in developing markets, stumble through a soft patch in growth or worse. At the same time, yet another round of government stimulus and Fed QE could see a few quarters of solid GDP performance as US politicians pull out all the stops to get the economy going and then jostle to take credit for it ahead of the presidential election next November. Efforts in this direction will be aided by the long period of dollar weakness, which has made the U.S. extremely competitive for sourcing production and services and attractive for investment.

Chart: US 2-year yields vs. average G-10 currency yield. In the chart above we have plotted the spread of the 2-year swap rates for the USD vs. an average of the 2-year swap rates for the remainder of the G10 currencies. We’ve then compared this with the USD’s performance vs. an evenly weighted basket of the remainder of the G10 currencies. It is clear that from a yield perspective, owning the USD is far less unattractive than it was just a few months ago. It is also clear from the chart above that the USD has been slow to respond to this development.

There are two further potential sources of USD strength – one is the likely return of the Homeland Investment Act (HIA), the original version of which allowed U.S. companies to repatriate profits tax free back in 2005. Q4 would appear to be the most likely timeframe to discuss and enact an HIA2, which would then go into effect in the New Year. Estimates of the amounts that might be repatriated this time around are far higher than the original HIA and could reach far over half a trillion dollars.

The other potential source of strength for the USD is that there is simply no alternative in a deleveraging world going where participants are unwinding their previous bets on “everything up versus the USD”. The lack of credibility of the Euro as the single currency faces an existential crisis now and in the coming few quarters will also continue to delay the demise of the USD’s status as the world’s reserve currency. Of course, these developments will not boost the U.S. currency forever and we wonder how long it will be until the long run accumulation of the twin U.S. deficits eventually returns to haunt the U.S. debt market and its currency.

Europe - crunch time
As we discuss in our introductory article to this publication, it is crunch time for the European Union, as the efforts of the European Central Bank and EU politicians have failed to outrun the galloping problems caused by the awkward framework of a single currency and 17 finance ministries and 17 sovereign bond markets. As we are leaving Q3, the situation is fast reaching the ultimate crossroads: either the EU makes a strong show of solidarity or a solution will quickly be forced upon it by the markets. 
The Euro could see a relief rally if the EU manages to muddle through with the solidarity enforced by the market’s discipline, but a longer term solution to European debt woes would likely involve some form of QE by the ECB to keep bond markets orderly and dig European banks out of their liquidity pinch. And if the USD has been so punished for the Fed’s various rounds of QE, why shouldn’t a similarly dim view be taken of the Euro for also engaging in money printing? Of course, the immediate relief that sovereign debt investments won’t go immediately bad could offset some of the deleterious effects of a European version of QE (save for Greece, where a severe haircut or Greek exit is a question of time). And a more stable sovereign debt and financial services environment could see the Euro rewarded for its deep liquidity versus higher beta, more pro-cyclical currencies as global growth possibly hits a soft patch over the next couple of quarters.

The Scandies - safe havens?
There was a flurry of talk about the potential for NOK and SEK to become safe haven currencies in the wake of the Swiss National Bank’s frantic and so far successful efforts to put a floor in EURCHF at 1.20. Immediately in the wake of the SNB’s announcement in early September, the market drove both NOK and SEK sharply stronger, completely out of proportion to any other development that could have explained the situation besides the idea of safe haven seeking (or reversals based on positioning?). Afterwards, however, the strengthening in these currencies was erased. So are they potential safe havens or not? There are two important features a currency must have in order to be considered a safe haven in today’s environment – a superior sovereign balance sheet and deep liquidity. CHF used to be the best option until the franc’s incredible strength made the SNB and Swiss government “go nuclear” in their intervention. Sweden has a very solid balance sheet and Norway has an impeccable one, but both SEK and NOK fail the liquidity requirement for a true safe haven. Also, SEK is traditionally a pro-cyclical currency due to its economy’s dependence on export markets. NOK is similarly dependent on oil exports, though it tries to sterilise oil revenues with its pension fund. Of the two, NOK would appear a safer harbour than many of the rest of the G-10 currencies, but it would be surprising to see performance similar to the Swiss franc’s (where the oversized Swiss financial industry was an additional contributor to the franc’s aggravated rise).

The Antipodeans: still waiting for the fall
Last time around we asked whether the strength in the Aussie and Kiwi versus the rest of the market was a bit overdone. Both currencies have begun to trade a bit more sideways in Q3, including one particularly sharp sell-off as equities slid off a cliff in early August. The kiwi has been the stronger of the two due to a few months of perkier economic data and the belief that the Reserve Bank of New Zealand might unwind the emergency rate cut taken in the wake of the earthquake earlier this year. But both rather extremely overvalued – particularly the Aussie, given present market circumstances and our expected scenario for Q4. Because Australia has the highest policy rate among the G10 currencies, it also will likely have the highest beta to risk as the Reserve Bank of Australia has more potential for policy accommodation. The housing bubble appears to be in near full deflation phase now Down Under and could cause a considerable pinch in the Australian banking sector, suggesting that eventually even the RBA has to get in on the Maximum Intervention game in the quarters to come.

Chart: AUD and NZD against the rest of the G-10. Aussie and kiwi rose to new multi-year highs against the rest of the major currencies during 2011 and were remarkably resilient despite the heavy sell-off in risk and weakening emerging market currencies. Just before publishing time, however, they suffered a setback in the wake of the FOMC meeting, which may serve as a catalyst that pushes them lower to a fairer value, given the darkening clouds in the global economic outlook and their normal pro-cyclical correlation.

G-10: the bottom lines

USD: A lack of alternatives and Maximum Intervention gone global will make the USD continue to look less unattractive in Q4 and the currency has been so weak for so long that the U.S. economy could reap some of the benefit.
EUR: It is crunch time for the Eurozone, which will need to pull together or face a further – and this time more urgent – existential challenge. Will Germany step up to foot the bill for the periphery?
JPY: The government bond rally and declining interest rate spreads (the carry in the carry trade) are the only real supports, as the domestic Japanese economy is relatively moribund. If bond markets pivot some day, so will the JPY, until then, it could remain strong for a while yet.
GBP: Sterling shows us the degree to which the Euro’s woes are driven by its untenable political and central bank framework rather than by the absolute magnitude of its sovereign debt as the UK debt load and deficits are far worse. Yet, GBP has already been endlessly punished, and similar to the USD, could rally “by default” due to dimmer prospects elsewhere relative to previous expectations.
CHF: The Swiss franc has become the latest, most impressive victim of maximum intervention, which makes the world believe that no fiat currency can be a true safe haven forever. We assume that the determination of the SNB and Swiss Government will keep the CHF weaker.
AUD: Aussie did sell-off when risk appetite swooned in early August, but it is far too resilient given risk averse circumstances, prospects for slower growth in Asia, and on the risk of a disorderly unwinding of the domestic housing market. A heady adjustment lower could finally arrive in Q4 for the Aussie.
CAD: It will continue to trade as an “in-betweener” – a lower beta risk currency that may find resilience in its exposure to a less weak than feared U.S. economy. Still, the currency has only so much upside despite the solidity of the sovereign balance sheet and banks, as Canada features the world’s most overleveraged consumer.
NZD: Some of its strength has derived from economic activity from earthquake rebuilding and some of it from Chinese diversification interest (which throws huge weight around in the less liquid kiwi). The rally could falter in Q4 on weaker than expected Asian growth prospects and as the RBNZ stays pat.
SEK: Likely to remain a pro-cyclical currency – the country could face a slowdown that could be multiplied by a European demand slowdown. In addition, Sweden’s housing market is a raging bubble, though the signs of strain have yet to show much. Could they begin to do so in Q4?
NOK: Rate expectations have tumbled as with most other currencies where there is enough rate to cut. NOK may find a safe harbour bid to a degree due to the country’s unmatched sovereign balance sheet, so strength versus the most pro-cyclical currencies might come into play in Q4 and Q1.

Q4 Monetary Policy

U.S. monetary policy
As we had previously suggested was possible at its 20/21 September meeting, the Federal Reserve announced that it would indulge in a so-called ‘Twist’ operation-selling $400 bn of its holdings of under 3-year Treasuries and buying $400bn of 6-30 year maturities in an attempt to lower long-term yields - given their direct correlation with mortgage rates and also the discount rates used by commercial enterprises to evaluate the viability of long-term business ventures.

The post-meeting statement noted “continuing weakness in overall labour market conditions” and “only a modest pace” of growth in consumer spending and repeated the committee’s belief that inflation will “settle...at levels at or below those consistent with the Committee’s dual mandate”. As a result, 30-year yields fell below 3.00 percent - one of our ’10 Outrageous Predictions for 2011’, made last December.

Our feeling continues to be that risk markets will continue to be underwhelmed by the Fed’s actions and that ‘Operation Twist’ is but the next step in an inexorable move towards what we long ago dubbed ‘QE Infinite’- repeated QE’s with diminishing returns.

The next instalments in the saga will be QE3 - probably in Q1 2012, as the economy fails to revive and stock markets languish. A reduction in the rate the Fed pays banks on excess reserve holdings from 25 bp to 10 bp is also highly likely within that timeframe, in a desperate attempt to encourage banks to lend to the real economy.

Eurozone monetary policy
As predicted in our Q3 Outlook, the ECB duly raised its main refinancing rate to 1.5 percent at its July meeting and, at the time, markets expected that this was the beginning of an inexorable march higher in rates over the coming months and years. However, unfortunately the world economic situation in general and that of the Eurozone in particular, has exhibited a marked deterioration since then.
In addition to the general gloom which has descended upon the world’s largest economy, as discussed above, the main developments in the Eurozone have been as follows:

• July saw the announcement of a further package of measures from the European Council aimed at easing the Greek crisis and halting contagion into Spain and Italy. As has become the norm over the last 18 months the market was at first reasonably impressed, but enthusiasm quickly evaporated. This was principally because the European Financial Stability Facility (although newly authorised to intervene in the secondary bond markets of all European Monetary Union countries if the European Central Bank judged that ‘exceptional financial market circumstances’ posed a threat to financial stability) was not increased in size, and so would be completely inadequate should it become necessary to support Spain and Italy.
• Therefore, it finally dawned on the markets that the only solution that would bring an end to the debt crisis was a fiscal union, and speculation quickly arose that the natural precursor to this, the issuance of Eurobonds for which EZ governments would be jointly and severally liable, was now on the cards.
• Germany quickly and resolutely made it clear that it would not support the issuance of Eurobonds and the German Constitutional Court ruling on 7 September also underlined this position.
• A surprise fall in EZ core CPI in July from 1.6 percent to 1.2 percent, a level maintained in August.
• Weak business sentiment surveys.

Given the climate created by all of the above, it came as no surprise when fear did indeed spread to Spain and Italy (taking their 10-year bond yields well above 6 percent), so the ECB had to reluctantly revive its bond buying programme or securities markets programme (SMP) in the face of a divided ECB Governing Council, with the Bundesbank implacably opposed to the measure.
It therefore also came as no surprise when ECB President Trichet adopted a much more dovish tone at the news conference following the 8 September meeting of the Governing Council. Although it was apparently too embarrassing to reverse the recent rate hikes so soon, he made it clear that further increases were now firmly off the agenda and left the door wide open for decreases in the near future.

We now expect that, at the very least, before year-end the ECB will reintroduce the provision of unlimited, fixed rate, long-term liquidity to banks, thus flushing the system with liquidity and forcing actual market rates lower than the refinance rate, if it chooses to keep this at 1.5 percent to save face, but probably also a reduction in same back to 1 percent and in the deposit rate from 0.75 percent to 0.25 percent. If the real economic decline accelerates, or the EZ debt crisis spirals out of hand, or interbank funding dries up, then these moves could come very quickly and we may even see the refinance rate reduced to 0.5 percent.

Japanese monetary policy
Mindful of the worsening economic situation, The Bank of Japan increased its Asset Purchase Programme by Yen 10 trn at its meeting on 4 August. The measure was also no doubt intended to reinforce that day’s foreign exchange market intervention, aimed at weakening the yen. Although this achieved initial success, with the yen dropping from approx 77.00 to the dollar to 80.24 on the day, global financial turmoil has since fostered investors’ continued search for safe-havens, quickly taking the dollar back below 77.00.
We maintain our call for unchanged Japanese rates throughout 2011, and indeed also through 2012, and feel further quantitative easing is very likely.

UK monetary policy
The minutes of the 8 September Bank of England’s Monetary Policy Committee (MPC) meeting revealed that the decision to leave rates unchanged at 0.5 percent was of course unanimous. This came as no surprise to us or to the markets and, although Adam Posen remained the only member calling for increased asset purchases, (voting again for an additional £50 bn), “some” other members also moved towards QE2 - “This meant that the balance of risks to inflation in the medium term was likely to have shifted further to the downside. Most of these members thought that it was increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point”
As a result, we now feel that QE2 before Christmas is extremely likely, and rates are certainly not going to rise before 2013. 

Market Preview - 11 October 2011

Forex Overnight: EUR trading weaker against USD
The EUR has weakened against the USD, this morning, ahead of Slovakia’s final vote on the enlarged European Financial Stability Facility later in the day. Reports suggest that Slovakia’s ruling coalition was unable to end a dispute over participation in the euro-area bailout fund. The GBP has lost ground against the USD, this morning, ahead of a report, scheduled for release later today, which is expected to show that the U.K. industrial production declined in August. At 6 am, the EUR and the GBP have declined 0.1 percent and 0.3 percent against the USD, to trade at $1.3632 and $1.5618, respectively.
The JPY is trading 0.1 percent higher against the EUR, while it has edged marginally higher against the USD, ahead of the release of the minutes of the Federal Reserve’s (Fed) September meeting, later today.

UK Stocks: Likely to open in negative territory
The FTSE 100 is likely to open 6 to 8 points in the red.
Key economic indicators scheduled for release today include Industrial & Manufacturing Production, NIESR Gross Domestic Product Estimate and DCLG U.K. House Prices.
N Brown Group, Edinburgh Dragon Trust, Epistem Holdings and Fusion IP are scheduled to report their results later today.
Royal Dutch Shell has announced force majeure on its exports of Nigerian Forcados crude, following a leak on the Trans Forcados pipeline.
In an interview with the Financial Times, Steve Bertamini, the Head of retail and SME banking at Standard Chartered, has criticised western regulators for using the wrong mechanisms to handle the financial crisis.
Ian Cheshire, the CEO of Kingfisher, has forecast a “broadly flat” retail market in the U.K. for 2012, and added that it would be “more robust” in France.

Asia: Trading in the green
Asian markets are trading in positive territory this morning, amid continued optimism that European leaders would be able to stem the region’s debt crisis.
In Japan, markets are trading higher, with Sumitomo Mitsui Financial and Mitsubishi UFJ Financial Group trading up, amid renewed optimism over the prospectus of a solution to the European debt crisis. Toyota Motor has jumped, after it reported a rise in Chinese sales in September. Nidec Corporation has soared, after it announced an increase in its share buyback plan. At 6 am, the Nikkei 225 is trading 2.1 percent higher, at 8,787.5.
In China, Industrial & Commercial Bank of China, China Construction Bank Corporation, Bank of China and Agricultural Bank of China have added value, after state-run Central Huijin Investment bought shares in these banks. In South Korea, Shinhan Financial Group and KB Financial Group Inc have risen, amid optimism that the Eurozone debt crisis will be resolved. Shinsegae Company and Hyundai Department Store have gained, after South Korean wholesale inflation in September eased. In Hong Kong, markets are trading in positive territory, following China’s support for banking stocks.

US Stocks: Futures trading in the red
At 6 am, S&P 500 futures are trading 3.1 points weaker.
NFIB Small Business Optimism and IBD/TIPP Economic Optimism are the key economic indicators scheduled for release today. Investors also await the release of minutes of the Fed’s 20 September 2011 FOMC Meeting.
Alcoa, WD 40 Co, Synergetics USA, Century BanCorp, and Joe’s Jeans are scheduled to announce their results later today.
Felcor Lodging Trust, the top gainer in after hours trading session yesterday, soared 7.0 percent. Standard Pacific, Amylin Pharmaceuticals and Sotheby’s featured amongst the other major gainers, advancing 5.6 percent, 3.9 percent and 3.9 percent, respectively. Mistras Group advanced 3.3 percent, after its first quarter results surpassed market expectations. Sally Beauty Holdings declined 4.3 percent, after it announced a secondary offering of 15.0 million shares of common stock. Amongst the other key laggards, GNC Holdings, La-Z-Boy and CME Group plunged 9.8 percent, 9.3 percent and 4.6 percent, respectively.
Yesterday, the S&P 500 index surged 3.4 percent, after German and French leaders pledged to present a comprehensive plan to tackle the Eurozone debt crisis and recapitalise European banks. Denbury Resources, the top gainer on the S&P 500 index, rallied 9.6 percent. Record breaking pre-orders for iPhone 4S helped Apple to climb 5.1 percent. Higher metal prices led Alpha Natural Resources, Cliffs Natural Resources and Freeport-McMoRan Copper & Gold to surge 8.9 percent, 8.6 percent and 5.9 percent, respectively. Banking sector stocks, Citigroup, Morgan Stanley, Wells Fargo & Co and Bank of America Corporation soared 7.6 percent, 7.4 percent, 6.5 percent and 6.4 percent, respectively, as risk appetite amongst investors increased. Micron Technology jumped 4.2 percent, after a broker upgraded its rating on the stock to “Buy” from “Hold”. Sprint Nextel Corporation plunged 7.9 percent, after a broker downgraded its rating on the stock to “Neutral” from “Buy”. Netflix declined 4.8 percent, even as it abandoned plans to breakup its DVD-by-mail and online streaming services.

European Stocks: Expected to open marginally higher
The DAX and CAC are expected to open 7 to 8 points and 3 points, firmer, respectively.
No major economic indicators are scheduled for release today.
Givaudan SA, Banco Espanol De Credito SA, Vilmorin & Cie SA and CropEnergies AG are scheduled to report their results later today.
Roche Holding AG has indicated that a small early-stage study has revealed that its experimental drug showed promise in the treatment of Alzheimer’s disease.
Louis Gallois, the CEO of EADS, has stated that the company has not been affected by the difficulties French banks are facing in securing dollar financing.
Reuters has reported that the European Commission would not include over-the-counter derivatives in its review of Deutsche Boerse AG’s planned takeover of NYSE Euronext.

Macro Update
Japan's current account surplus drops
Japan's current account surplus has dropped 64.3 percent Y-o-Y to ¥407.5 billion in August, and sharply lower from the ¥990.2 billion surplus in July.
UK retail sales increase
On a monthly basis, overall retail sales in the U.K., as measured by the British Retail Consortium, have climbed 2.5 percent in September, compared to a 1.5 percent rise in August.
Optimistic on stimulus impact, says Miles
Bank of England policy maker, David Miles, has stated that there are “good reasons” to think that the Central Bank’s expansion of stimulus will aid economic recovery.
ECB backs bond guarantee option
The European Central Bank (ECB) has indicated that it favours government guarantees rather than the Central Bank’s money market operations to strengthen European bailout fund.
Greece pledges to keep creditor promises
The Greek Finance Minister, Evangelos Venizelos, has stated that the Greek government will keep promises to international creditors on pension and wage cuts.
European leaders postpone summit
European leaders have pushed back a debt crisis summit from October 18 to October 23, amid opposition to the German Chancellor, Angela Merkel’s drive for deeper-than-planned write-downs of Greek bonds.

Daily Report: Euro Mildly Higher on Franco-German Pledge

Euro opens the week mildly firmer after Germany and France pledged to provide sustainable solution to Greece situation and the European debt crisis, as well as bank recapitalization by the end of the month, before the G20 summit in Cannes. Meetings including European Council and EU finance ministers will be held to finalize the details of the proposal. France Sarkozy noted that they will "recapitalize the banks", in "complete agreement" with Germany and they will take a common position on all issues. Germany Merkel noted that there will be a "comprehensive package that will enable closer cooperation between euro zone countries" and that could include changes to the Lisbon treaty.

Moody's warned that it may cut Belgium's credit rating after the bailout of the French-Belgian Dexia. Belgium will buy the Belgian banking business of Dexia for 4B euro and provide the bulk of guarantees to cover leftover assets of the parent group. According to the agency, the country's Aa1 rating is currently under review due to materially increased funding costs for sovereigns and banks of countries with high debt, risks to economic growth and the weight on public finances of supporting the banking sector.

BoE Weale said that there "quantitative easing does support the economy" and there is "quite a lot of scope" for further easing. Weale noted that the current situation bears similarities to the 19030s and there is a "sharp deterioration" in UK's economic prospects and "the case for support has grown in the autumn as the financial situation has appeared to deteriorate." On the other hand, policy maker Sentance wrote on his blog that BoE's governor's statement last week is "potentially very misleading" as he didn't present a distinction between economic and financial crisis and that's "counterproductive" in maintaining confidence of the business community.

The economic calendar is light today with Japan, the US and Canada on public holiday. German trade surplus widened to EUR 13.8b in August. Eurozone Sentix Investor Confidence will be released later today.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 102.19; (P) 103.02; (R1) 103.51; 

With 101.65 minor support intact, EUR/JPY's recovery from 100.74 could extend further higher. But after all, we'd maintain that break of 104.92 resistance is needed to confirm short term bottoming. Otherwise, near term outlook will remain bearish and recent decline is still in favor to continue. Below 101.65 should flip bias back to the downside and end EUR/JPY through 100 psychological level towards 200% projection of 123.31 to 113.41 from 117.74 at 97.94. Though, break of 104.92 will confirm short term bottoming, on bullish convergence condition in 4 hours MACD and bring stronger rise to 106.98 and above.

In the bigger picture, whole down trend from 2008 high of 169.96 is still in progress and is building up downside momentum again. Sustained trading below 100 psychological level should pave the way to 100% projection of 139.21 to 105.42 from 123.31 at 89.52, which is close to 88.96 all time low. On the upside, break of 111.93 resistance is needed to be the first signal of medium term reversal. Otherwise, we'll stay bearish. 

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.3318; (P) 1.3421 (R1) 1.3482; 

EUR/USD's recovery from 1.3145 extends further higher today and intraday bias remains mildly on the upside. But still, note again that break of 1.3689 resistance is needed to confirm short term bottoming. Otherwise, outlook will remain bearish. Below 1.3360 minor support will flip bias back to the downside and should send EUR/USD to 161.8% projection of 1.4939 to 1.3969 from 1.4548 at 1.2979, which is close to 1.3 psychological level. However, break of 1.3689 will confirm short term bottoming, on bullish convergence condition in 4 hours MACD and should bring stronger rally to 1.3936 and above.

In the bigger picture, current development indicates that medium term rise from 1.1875 has completed with three waves up to 1.4939 already. That also suggests that it's merely part of the consolidation pattern that started back in 2008 at 1.6039. Further decline would now be seen to 1.2873 support first and break will target 1.1875 and below. On the upside, above 1.4548, resistance is needed to confirm completion of the fall from 1.4939 or we'll stay bearish in EUR/USD.

EUR/GBP Daily Outlook

Daily Pivots: (S1) 0.8554; (P) 0.8629; (R1) 0.8671; 

EUR/GBP rebounds stronger today and the development suggests that recent consolidation in the converging range is still in progress. Intraday bias is turned neutral. We'd expect some more choppy sideway trading but after all, outlook remains bearish as long as 0.8795 resistance holds and we'd expect an eventual downside break out through 0.8529 support. Nevertheless, break of 0.8795 will turn focus back to 0.8884 key resistance.

In the bigger picture, price actions from 0.9799 (2008) should be unfolding as a consolidation pattern in the long term up trend. The first leg is completed with three waves down to 0.8067. Second leg should also be finished at 0.9083. Fall from 0.9083 is treated as the third leg and should target 0.8067 first and possibly further to 61.8% projection of 0.9799 to 0.8067 from 0.9083 at 0.8013 (which is closes to 0.8 psychological level). Nevertheless, we'd expect strong support from 0.7693/8186 support zone to contain downside to finish off the consolidation. On the upside, break of 0.8884 resistance is needed to invalidate this view or we'll stay bearish now.