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How Would Currencies Respond If This Happens?

 October 18, 2012 11:55 PM

Everybody knows that most major economies carry a monumental amount of public debt. In fact, there is very little realistic chance that these obligations will be paid off and not only in case of Greece, Spain or Italy. In some countries, central banks have become the largest holders of national debt, largely through easing operations meant to stimulate economies. In essence, governments are borrowing from other government institutions, which are "printing money" and putting these debentures on their balance sheets. The idea is to sell them in some indefinable future time and hopefully restore balance. That would not relief the governments from obligations, leading some to speculate that central banks might have to "cancel" some or all of these debts.

[Related -Euro Bearish Ahead Of Minimum Bid Rate]

According to an article in the Financial Times, this idea has never been seriously entertained, but is becoming more appealing. Some possible outcomes of such actions are examined, but they deal more with the inflation/deflation aspect. I am more interested in what would happen to currencies. If one central bank decided to cancel (forgive, write off) its government's debts, would other countries follow? All monetary systems are based on fiat money, so the process could be similar everywhere. Would the currency of the first country to try it simply collapse, or would other central banks support it at some level? After all, they might need similar "help" in the future. Will general public believe in these gimmicks, or turn to gold and silver fearing collapse of the financial system? While this may be speculative for the moment, I have a feeling we will hear more on the subject going forward.

[Related -Gold and Silver Outperforming General Equities for the First Time Since 2011]

Several of the possible trades I have discussed lately have not materialized, at least not yet. These currency pairs have moved in opposite directions, not filling my orders. No big deal, not trades – no harm done. Would be much worse if they were triggered and reversed, which happens occasionally. One of these currencies is the EUR-CAD, where we can see a significant rally, away from my intended short entry at 1.2565. It remains to be seen if this move is overdone, but I still want to sell it under the low. So far, I have not moved my order to the 1.28 handle, because I want to see more price development. In a perfect world, the EUR-CAD would make a new high, above 1.2940. If not, the current minor low is still a play, only with smaller position size. Meanwhile, Friday is my day for short-term breakouts from ranges established prior to the London open. All USD pairs are possible candidates.

Mike K.

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