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Currency Wars: Trading the Driver$

By: Gordon Long | Monday, November 26, 2012

Abridged from the November edition of TRIGGER$

Since September, the Currency Wars have escalated. It isn't just because of the seminal monetary events of the Federal Reserve's QE III "unlimited" and the ECB's OMT "Uncapped". It is highly likely, more about the fact that China announced its eleventh agreement that effectively bypasses using the US dollar with China's strategic trading partners. The latest agreement with Russia places trading oil, in non-US dollars, into the spotlight. The infamous petrodollar has had its destructive profile raised.

The Petrodollar has long been the cornerstone that solidified the US dollar as the key currency reserve holding. The Petrodollar strategy is arguably more important that the Bretton Woods agreement which officially made the US dollar the world's reserve currency at the end of WW II. This is now being called into question. Minimally, it suggests a weakened requirement for holdings of the current levels of US dollars in sovereign reserve accounts.

For the sake of space I won't lay out all the details of this but instead refer you to two recent video releases I have produced and participated in on the subject.

What is important to Traders is what it means to your trading strategy in the short to intermediate term. To Investors it has profound longer term consequences.

To determine short term effects, we first need to understand the relationship of the Driver$ involved. The three critical currency relationships near term are the US$, the € and the ¥. Then we need to understand how they will effect US Treasury yields.

First however it is important to understand the controlling mechanism of global fiat currencies.


The $67 Trillion Shadow Banking System (The Fiat Currency Control Block)


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The Global Economy is approximately $70 Trillion. According to a just released report by the Financial Stability Authority (FSA), charged with investigating it globally, the Global Shadow Banking System was $67T in 2011.

It is up a staggering $6T in 2011.

This means that unofficial, unregulated, offshore entities now effectively control the pricing of global fiat currencies. Through the $637 Trillion SWAP market (also unregulated and offshore trading currency, interest & credit default swaps) they in turn control global interest rates.

The major currency domiciles within the Shadow Banking Industry. It's called absolute control.

EURO:YEN

Consider first the Euro : Yen Cross


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The rising green arrow in the above graphic is more about a planned and managed attempt at weakening the Yen than strength in the Euro.

The YEN must be weakened as its strength is crippling Japan's export economy.

The Yen will soon start weakening SIGNIFICANTLY against the Euro


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EURO: US$

EU-EURO SITUATIONAL ANALYSIS (charts below):


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YEN:US$

Consolidation


US Dollar

The final chart show what in fact occurred over the last 30 days and what we presently anticipate:


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US Treasury Debt & Fiscal Cliff

This chart shows what we presently anticipate . "THIS IS A MAJOR INFLECTION POINT.

Potential for further Financial Repression

Consolidation

Expect a correction and consolidation."

REMEMBER: Financial Repression is at work here and US Bond Yields and Interest Rates MUST be further reduced.

We presently expect the 10 Year US Treasury Bill to eventually break below 1% which supports the potential target shown above & below.


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This is a Well Managed and Controlled Regression Channel

as the developed world tries to rebalance within global imbalances.


Conclusions

The global economy is near stall speed as the already attempted stimulus and monetary policies have failed to deliver. The controllers of the fiat currency camp (US, EU, Japan and UK) must therefore further lower REAL yields and extend duration through central bank guarantees.

They will do this in attempt to buy further time until the 'magical' recovery happens.

Frankly, the politicos know of no other recourse despite it having already failed continuously.

NIRP

Japan has just completed its ninth Quantitative Easing and have concluded ZIRP now needs to be NIRP (negative Interest Rate Policy). It is highly probable that this will reignite the Yen Carry Trade and strengthen the US$. In turn this will hurt equities and compress PE ratios further.

Expect violent counter rallies as the right shoulder is put in, within a long term, 10 year Head and Shoulders pattern.

Traders need to carefully watch the US$, the € and the ¥. cross relationships and credit spreads associated with US Treasury Yield curve and High Yield (HY) "B" rated instruments.

Good luck, and good trading.

 

Author: Gordon Long

Gordon T. Long
Publisher - LONGWave

Gordon T. Long

Gordon T. Long has been publically offering his financial and economic writing since 2010, following a career internationally in technology, senior management & investment finance. He brings a unique perspective to macroeconomic analysis because of his broad background, which is not typically found or available to the public.

Mr. Long was a senior group executive with IBM and Motorola for over 20 years. Earlier in his career he was involved in Sales, Marketing & Service of computing and network communications solutions across an extensive array of industries. He subsequently held senior positions, which included: VP & General Manager, Four Phase (Canada); Vice President Operations, Motorola (MISL - Canada); Vice President Engineering & Officer, Motorola (Codex - USA).

After a career with Fortune 500 corporations, he became a senior officer of Cambex, a highly successful high tech start-up and public company (Nasdaq: CBEX), where he spearheaded global expansion as Executive VP & General Manager.

In 1995, he founded the LCM Groupe in Paris, France to specialize in the rapidly emerging Internet Venture Capital and Private Equity industry. A focus in the technology research field of Chaos Theory and Mandelbrot Generators lead in the early 2000's to the development of advanced Technical Analysis and Market Analytics platforms. The LCM Groupe is a recognized source for the most advanced technical analysis techniques employed in market trading pattern recognition.

Mr. Long presently resides in Boston, Massachusetts, continuing the expansion of the LCM Groupe's International Private Equity opportunities in addition to their core financial market trading platforms expertise. GordonTLong.com is a wholly owned operating unit of the LCM Groupe.

Gordon T. Long is a graduate Engineer, University of Waterloo (Canada) in Thermodynamics-Fluid Mechanics (Aerodynamics). On graduation from an intensive 5 year specialized Co-operative Engineering program he pursued graduate business studies at the prestigious Ivy Business School, University of Western Ontario (Canada) on a Northern & Central Gas Corporation Scholarship. He was subsequently selected to attend advanced one year training with the IBM Corporation in New York prior to starting his career with IBM.

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.

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