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Christmas Gift!

November 30, 2011 – 6:27 pm

The European banks got a gift this morning, but how does that affect the U.S. or Asia? Essentially, the central banks; U.S., Japan, ECB, Bank of England, and the Swiss National Bank, just made it easy for the European banks to swap Euros for Dollars if they so choose. They did this by lowering the cost and having the ECB agree to swap any amount of Euros for Dollars for the banks. The problem was that the European banks were hoarding cash thus restricting money flow which means a slowing of the economy in Europe. That could have easily spread to the other countries. This is an effort to keep money flowing around the world without restraint.

The result of this action is a weaker U.S. dollar and a stronger Euro. That is not all bad for it keeps our exports, which have been growing for months to keep growing. A stronger dollar would slow exports and the dollar in recent weeks has been gaining strength. The effort does very little for China but would help Japan by making their exports to us cheaper. I noted this morning that China lowered their reserve requirements at their own banks, but I doubt that was in reaction to what the other Central banks were doing. It was more out of concern for their weakening real estate market.

The effort by the central banks, being coordinated and clear, will affect stock prices as we saw this morning. But it is in the sustainability that is important. There will have to be more and consistent European efforts to keep the momentum going forward to save their banks and to save the Euro. In fact it has to be Germany that decides to save the Euro and bolster the banks. They would have to back up the debt, in one way or another, of other European countries. I am not sure they want to do that. If they don’t their own economy suffers but politics being what they are it may not be doable.

Meanwhile in the short run our Christmas rally has arrived.

Good Trading
Steve Peasley

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