Forex traders looking for trading clues in the details surrounding E.U. bank stress tests; Germany’s Merkel sees realism in E.U. bank stress test

Analysts point out important considerations regarding bank stress test – As forex traders ponder the real meaning of the E.U. bank stress test for the value of the euro, veterans in the field suggest traders remember the old maxim – the devil is in the details. What is known for sure are the following facts. (1) The test results are to be publicly announced on Friday, July 23, at 6 p.m. Central European Time. (2) There are three scenarios in the stress test – banks must maintain a 6% Tier 1 capital ratio, they must estimate losses on banking business, and they must estimate losses on sovereign debt holdings. So, what should forex traders look for in the run-up to the release of results and in the wake of the release? Here are some suggestions offered by European analysts. What will be the reaction of individual governments and which governments will remain steadfast in supporting their nation’s banks? How much in toxic assets do the banks really hold? What governments already have emergency plans in place (for example, according to various reports, Germany has a rescue fund of 480 billion euros, Spain has a rescue fund of 99 billion euros, and even Greece has a rescue fund of 10 billion euros)? What is the cumulative shortfall among the banks expected to be and how much will it really be (there are suggestions the numbers can range from 30 billion euros to 75 billion euros)? Will the test really prevent some banks from failing? These analysts also see some positive outcomes in the short-term as a result of increased bank transparency. First, it should increase the likelihood of banks being willing to trade with each other. Second, banks will be prompted to put in place contingency plans in the event of an imminent failure. At press time (July 21 at 12:07 p.m. in New York), the euro was down and hovering just above 1.2800 USD.

Optimism is the order of the day in Berlin – German Chancellor Angela Merkel today described the bank stress tests as “very realistic,” while acknowledging that reports of the failure of Hypo Real Estate Holdings (HRE) sound “plausible.” Forex traders and analysts who believe in the euro may find this encouraging since Germany will have to fork over as much as 2 billion euros to recapitalize the nationalized HRE. Morning activity on the Frankfurt Stock Exchange seemed to validate Merkel’s apparent optimism with the value of shares in several top German banks going up.