The Banking and Strategy Initiative

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US Economy: Not a wrinkle on the dollar for 2011

Update: Italian 3 yr BTPs and 10 year bonds netted a good $15 bln auction at below 7% (6.98%) and 6.89% ( for the 3 yr BTP) on Thursday while the jobless data bac home was a stuck in the mud 381,000 still below 400,000

The Dollar index is well on the verge of crossing into uncharted territory, already above the rare 80 against the basket of 7 currencies as the Euro finally slumped again after a good Italian short term auction Long Dated Italian BTPs come online on Thursday in this last auctions for the year. The Dollar’s strength though compared often to the Euro has a story of its own as its just the Euro getting directly correlated to the fortune of US equity markets, the Fed adding its own direct liquidity swaps for good measure.

The Euro is still holding 1.29 despite the slump and the Dollar’s rise is stil lkeeping commodities in check as the stimulus has shifted across the pond. Bot the UK and the ECB are good candidates for a Quantitative Easing program, though why the ECB will stretch itself after its current stance and a $800 bln funding for banks just to get rid of the collateral program, beats me but I personally belive in letting the central banks and the politicians run around a little on their own steam after having signed the new treaty in effect and fiscal discipline marks showing higher credit for the Euro zone than for American Finance denizens Yields have been firmly lower and entire worlds and development paradigms survived for decades at a time on double digit interest rates, even today Brazil after three rate cuts is administering a bank rate above 11%.

Italians should not be bothered by the yield but for the growing interest to be financed on its high debt. In todays $14 bln auction, yields on 2 year zeroes came down to 4.8% , from 7.8% last month. Six month debt for Italy though is still a tad costlier than for Spain at 3.25%.

More worrisome is the daily new record of deposits at the ECB directly that is the concern as flight from national banks has grown to worrisome proportions. Today’s totals are under $10 bln lower than a $600 bln watermark, near double from levels in 2010.

The US in the meanwhile seems not to care for its ultra low interest rates a s it increases the debt ceiling again, first by the $100 blnit already approved from $14.3 tln The deposits do help the ECB maintain a straight face as it s balance sheet already larger than the Fed as aof last week has grown by another $242 bln, most of it from new approved lending for Eurozone banks fighting an ugly war for collateral and debt due for return in the first three months. The Fed balance sheet of $2.9 btln has recently been crossed and now the ECB balance sheet is up to $3.7 trillion.

US equities offer a great 2012, esp with the deal market looking up and US corps looking at prize jewels on offer from European banks at competitive rates. As many emerging markets have not reached their bottom yet and Turkey and Venezuela are unlikely to continue rising without taking a break, without depth in equities in China and the South East Asian economies US is likely to be in the Top 3 equity destinations in 2012. Equities need a successful market environment and resilient global hotspots from North Asia ( South Korea, Jaoan, China) and Germany lack the depth in equity markets to merit a comparison with the opportunity in the US markets. The BRICS already on aturnaround cusp, have to wait a while and will never need more than 1/6 of global equity allocations. Europe in general will more be a target for good investments as PE and funds learn the value of buying at the right price and Yuan trade is unlikly to cross its impact from the fixed Income Markets into Equity. It is an ominous start for the US , the end of the world pronouncements from the Mayans notwithstanding, as election years have returned 14% on average and the streak is cleaner where re-elections are at stake.





EURO holds too ( maybe 1.19)

No luxury shopping in Europe anymore

No bright young lads with good jobs showing at anyone’s door

No US Government shutdowns as there is enough to borrow

No spending cuts till 2014

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