The Dollar Smile Theory, Overbought Euro

Euro Falls Against Dollar, Yen on Surprise Retail Sales Decline: “The euro fell against the dollar and the yen after retail sales unexpectedly dropped and Bayerische Landesbank reported 4.3 billion euros ($6.7 billion) in writedowns from the collapse of the subprime-mortgage market.

The euro weakened versus all of the most-actively traded currencies after a European Union report showed retail sales declined 0.5 percent in February, pointing to a slowdown in the region and adding to pressure for interest-rate cuts. BayernLB's writedown was double its previous estimate and the biggest of any German state bank.”

A couple of the German banks in particular have been ‘taken out, and shot.’ Somehow UK banks, who REALLY got into the real estate lending mess both at home and abroad, have managed to mysteriously avoid really significant write downs. Sure, Northern Rock imploded. But that was unrelated. That was due to the sudden inability to re-finance short term debt. There has to be more toxic waste out there in the Euro area banks.

“The decline in European retail sales reversed the previous month's increase, data from the EU statistics bureau in Luxembourg showed. The region's biggest economy, Germany, registered a 1.6 percent drop. The ECB has room to lower interest rates because economic growth is slowing “sharply,” the International Monetary Fund said yesterday.”

“Munich-based BayernLB said profit fell to 175 million euros last year from 989 million euros in 2006. The losses from the credit-market slump bring total writedowns at Germany's state- owned banks to more than 11 billion euros.

The British pound and euro declined against the dollar after Goldman, Sachs Group Inc. lowered earnings outlooks for U.K. banks.”

BayernLB Reports Record EU4.3 Billion in Writedowns (Update1): “Bayerische Landesbank reported 4.3 billion euros ($6.7 billion) in writedowns from the subprime- market collapse, double its previous estimate and the biggest of any German state bank.”

The global ‘decoupling’ argument is a dead. I’ve argued this before:

The Global ‘Decoupling Theory’ is Garbage
Global Decoupling Theory, Correlation Contagion
World Recession and the Perfect Short Squeeze

“This is evidence that Germany is finally starting to feel the effects of the U.S. slowdown and credit crunch, putting the euro under pressure. Euro-dollar is now in a broad topping-out process. The region's common currency will fall to $1.50 by the end of the second quarter.” –Ian Stannard, a currency strategist at BNP Paribas

“The euro is poised to fall significantly. A slowdown in the U.S. will eventually filter through to Europe. The ECB will be forced to cut.” -Akira Takei, Mizuho Asset Management Co.

In anticipation of the world finally starting to catch on that this mess isn’t just a U.S. problem, I’ve spent the week selling the EUR:USD cross and selling the CAD against the JPY.

Related Posts:
The Dollar Smile Theory
Commodities Unravel, Confidence Collapses