USD pairs seen treading a narrow path

A very slow morning in markets has allowed me to do some pondering (which in itself can be a dangerous exercise) and what follows I suppose is the disparate collection of these musings.

So yesterday we got the results of the independent audit “stress” test on Spanish banks, shock horror they came within the politically correct guidelines of what was deemed acceptable and in line with the still unofficially requested EUR 100 bn in aid for Spain. Now, like the oh so many stress tests we’ve had in recent years both here in Europe and across the pond in the US, these were based on a set of assumptions, varying from best to worst case scenario. And of course as is always the case, the devil is in the detail. In this instance the assumption of criteria for worst case scenario is so blaringly insufficient that it beggars belief that these tests and their results can be taken remotely seriously.

It reminds me of my university days wherein being taught about various economic models and theories invariably meant taking for granted certain assumptions so as to fit within the greater framework of the model/theory. Some of these assumptions were so blatantly preposterous that now in retrospect it’s no wonder that these models simply don’t work. As the old adage goes, “when you assume, you make an Ass out of U and ME”. And sure enough folks it is the politicians that are now making small donkeys of us all.

Spain is not saved, Greece is sill deep underwater, the Federal Reserve will not print more money until such time as it deems it fit to do so (to be read, post November election), etc etc.

So we sit now and wait for the inevitable donkey punch to the back of the head where we’re told that Europe is actually saved, or of course the alternate is where we (as the donkey) simply have enough of this nonsense and kick out with our hind legs as annoyed donkeys are known to do. The kick from us, is the total annihilation of the EURUSD back to parity. Sorry folks, as annoyed as this particular donkey may be, I think it will carry on for a while longer tolerating the annoying flies buzzing around its head.

Oh yeah and by the way, Moody’s downgraded 15 global banks and financial institutions last night in a move that was so far telegraphed that by the time the announcement came, some of the stocks of these institutions were actually being bid up, as the final print wasn’t as “bad” as many had assumed. And there it is again, the problem with assuming anything...

So how do I see things now?

Well my view (supported by my positions), is that having gone through all the machinations we’ve seen this week and put the worst of it behind us, the market (USD pairs mainly) will now spend the remainder of the day and to some degree next week (depending on how we close tonight) treading a narrow path between the already achieved 50% and 23.8% Fibonacci retracements, using the former as target and resistance and the latter as support for ensuing dip buying.
This is likely to continue until the next headline, failed Greek coalition, Spanish Tapas yields at 8%++, Berlusconi back running Italy, G20/Euro eco fin min meeting or something of that nature that once again spooks the donkey back into life and appropriate action.

For now however, this particular donkey is off to graze on some pre-weekend grass and admire his own reflection in a freshly polished helmet.