Revisiting the Euro, "Someone Knows Something We Don't"

You may recall last Tuesday (last week) I noticed something strange in 3C in the Euro and $USD and asked the question, "Does someone know something we don't?" The market was goosed higher early this week which seemed to be a natural progression from the May 15th 3C signals in the Euro/$USD.

There seems to be an immediate desperation to get long quickly, which could certainly be worth it even with the big picture very bearish. Market as a snap back rallies, bounces or counter-trend rallies -whatever you want to call it (As a reminder, bear market rallies are some of the most impressive rallies we see including during full-on bull markets), would certainly be worth going long for nimble traders and Wall Street, especially if there is an answer to the question I put forth on May 15th, "Does someone know something we don't?"

This is 100% speculation, but based on some facts. European banks are facing probably the worst capital crunch they have seen during this entire crisis. The ECB is not conducting LTRO operations currently to give the banks capital, the banks have few assets left to pledge as collateral (specifically European banks), just like during the credit/liquidity freeze of 2008 in the US, European banks are not lending (overnight lending) to each other for the same reasons capital froze up in the US during the Lehman crisis- COUNTER PARTY RISKS. This means one bank won't lend overnight or at any other term to another bank because they are unsure of the counter party (other bank) risk. With the downgrades of EU banks, the bank runs, diminished assets, secretive off the books trouble, etc. banks aren't lending to each other. As mentioned, the ECB is not providing the liquidity the banks need-I doubt they have the "Bazooka" needed to do so. So EU banks are turning to the only source of funding they have left, which is also the most expensive: Cross Currency Basis Swaps.

What this all means? The EU banking sector is experiencing a liquidity and credit freeze.

Why would Goldman want to get long and long fast? One possible answer is that we are about to see another globally coordinated round of intervention as we saw last November when EU banks were in a similar situation. The ECB and F_E_D participated, the PBoC also eased, but it is not for certain whether that was coincidental easing for Chinese reasons or whether they were acting in concert with the other 2 central banks, I suspect it was a bit of both. Lets not forget that at that time China wanted to do all they could within what they considered reasonable to keep their number one trading partner afloat. China has since (recently) given p on Europe and is looking for opportunities in Africa.

The point being, Goldman and Wall Street see this crisis, they know how the Central banks acted before in a similar, but less severe situation and may be in the know regarding another round of coordinated easing.

Such an action (depending on the size -the ECB's balance sheet is in a lot of trouble) would provide the near term catalyst to give us that last strong move I have been suspecting and it would fit well with the trends of Wall Street short term market manipulation.

Just food for thought, however if there is a round of easing announced, we will have answered the question asked on May 15th.