Outlook:

Not to beat a dead horse, but the EMU is in terrible trouble and getting away with denial and half-baked remedies. The summit that ended at 4 am today was the “14th in the 21 months since Europe pledged solidarity with Greece, and came amid mounting global pressure for the bloc to deliver a credible anti-crisis toolkit before a Group of 20 meeting Nov. 3-4 in Cannes, France,” as Bloomberg puts it.

Two points: We don’t understand why suddenly G20 has credibility. It is a new organization with unclear “authority” and no real power. G20 was formed out of complaints that G7 excludes the BRIC bloc and other emerging markets, but the self-interest of emerging markets and that of developed countries can be at odds, or can seem to be at odds, as when Brazilian FinMin Mantega accuses the US of currency manipulation by low interest rates and QE to save its own economy, causing hot money inflows to Brazil. Evidently Mantega thinks the US should prioritize Brazil’s self-interest above its own. G20 is never, ever going to work. Now G20 is being cited as a rescue organization for EMU. Well, the BRICs may decide to invest in the EFSF but that is a country-by-country decision, not a G20 organizational decision.

More importantly, we still do not have a viable solution to Greece’s overindebtedness if we define viability as goals and methods that the Greeks agree are realistic. Of course, what is realistic in Frankfurt (or Dublin) is very different from what is achievable in Athens. Why are markets—bonds, FX, equities—so willing to buy into obviously sub-optimal initiatives? We are not sure but the love affair with the euro goes some way toward explaining it, along with the alternative being too frightening. But, as detective story writers like to point out, pinning down motive accurately is key. You can ignore negatives because you are besotted with a single factor or you can be too paralyzed with fear to take the rational action, but not both at the same time. You can’t be simultaneously afraid for and afraid of. In other words, everybody’s thinking is muddy.

Apart from European dramas, today we get the first reading of US GDP and it may be quite nice, probably 2.5%, according to the Bloomberg consensus. This would be up from 1.3% in Q2 and 0.9% in the first half. The forecast range is 1.5% to 3.5%. The Q3 result is led by consumer spending, even if some of it is involuntary (gasoline and other energy prices) and not desirable (a drop in the savings rate to 4.5% in Aug from 5.1% in Q2). Moreover, according to the Bloomberg story, “July and August were the best months for U.S. exports on record, according to figures from the Commerce Department. A report from the agency yesterday showed sales of non-military capital equipment, like computers and generators, and excluding aircraft climbed at a 17% annual rate from July through September compared with an 11% gain in the previous three months.”

Let us not mourn a weak dollar, and let us also note that this recovery quarter came at the same time that the US sovereign rating was downgraded. Not to be Pollyanna, but an overly indebted country can grow its way out of it. That doesn’t mean the US will grow its way out of it, but to say that the strategy is not silly. Finally, we don’t want to jinx it, but yesterday the House Ways and Means Chairman Dave Camp said real progress is getting made on the deficit reduction bill, with about half the mandated deficit cut coming from spending and half from higher tax revenue.

As we go into the end of the week, we’d like to be able to report that good economic outcomes in the US and possibly even a good Congressional outcome are favoring the dollar, but it wouldn’t be a good reading. Next week we get payrolls and before that, the Fed policy meeting, at which QE3 may become explicit. These are both big dollar negatives and loom like a big black cloud over the dollar. The euro may not have many rays of sunshine, but so far the new ECB chief Draghi has not given any sign of a rate cut, which politically would be hard to justify so early in his tenure, anyway. At some point a sane reading of the relatively better economic and financial performance of the US “should” favor the dollar, but don’t hold your breath. Growth comes far down the list of determining factors, and bias toward easing high up. Will the euro reach the 200-day moving average around 1.4094? Probably not, but we don’t see a crash, either.

	SPOT	CURRENT POSITION	SIGNAL STRENGHT	OPEN DATE	OPEN RATE	POSITION GAIN/LOSS
USD/JPY	75.82	LONG USD	WEAK	10/13 /11	76.81	-1.31%
GBP/USD	1.5996	LONG GBP	STRONG	10/11/11	1.5627	2.36%
EURO/USD	1.4022	LONG EURO	STRONG	10/11/11	1.3601	3.10%
EURO/JPY	106.33	LONG EURO	STRONG	10/11/11	104.23	2.01%
EUR/GBP	0.8765	LONG EURO	WEAK	09/12/11	0.8592	2.01%
GBP/JPY	121.30	LONG GBP	WEAK	10/11/11	119.77	1.28%
USD/CHF	0.8740	SHORT USD	STRONG	10/11/11	0.9104	4.16%
USD/CAD	0.9949	SHORT USD	STRONG	10/10 /11	1.0266	3.19%
AUD/USD	1.0608	LONG AUD	STRONG	10/11/11	0.9934	6.78%
AUD/JPY	80.43	LONG AUD	STRONG	10/11/11	76.14	5.63%
USD/MXN	13.2331	SHORT USD	WEAK	10/13/11	13.3229	0.68%