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Dollar And Yen Fall On Risk Seeking Trend
Recent news coming out indicates that investors are buying the indications from earnings reports, housing data and other tepid macro news releases - of course the resulting dollar and yen weakness is not ultimately surprising, no matter what our views on the "safe haven" theory.
The implication of a strong dollar/yen rebound in the event of another crash has been pretty well documented by various outlets but the more interesting story is any further downside risk to the dollar/yen. It's pretty clear that the somewhat linear relationship between say, EUR/USD and any number of bullish indicators (SPY, HG, the Big Mac index), until now is somewhat untenable going forward and is likely to at least slow down. If the bullish sentiment is ultimately right and we have returned to "normal", the ridiculously strong macro linkages we have been seeing until now are likely to break. However, if we see a bounce back south any gains posted can vaporize as quickly as they came.
On net, the risk/reward for further weakness in the dollar/yen is pretty unattractive going forward. We may eventually get back to the FX levels (1.6 EUR anyone?) that we know and love but for now, there are more attractive things to do than to short the dollar.
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The alternative theory is that the money is leaving, period.
Cornelius,
I emailed Tyler yesterday and perhaps everyone should see it:
"In case you have not noticed, the ECB balance sheet is shrinking, while the Fed and the BE balance sheets are expanding. Something that adds to euro strength at the moment. I am structurally bearish euros, because of the whole Eastern Europe mess and a whole lot more---no treasury department, but a single central bank---and I don't think that the euro strength will last. Remember Roche and the liquidity pyramid?
Anyway, Rosie is a dollar bear this week. Intellectually, everyone should be. But, I do think the euro gets in trouble before the dollar collapse comes some day..."
What I meant to say is that I am looking for NEW lows in the EUR v.s. the USD. Don't know if that means that SPX 666 is toast (but why not)...
Andy Dufresne
I agree with this in large part and still cannot determine why the EUR is managing the strength that it is. Europe is in much worse shape economically than the US and their banks have yet to fully disclose the level of "toxic debt" on their books. This could come about over the next two years as the Pay-Option ARM debacle hits the US banking system like a set of brass knuckles. Either way the inverse relationship of the US markets and the EUR/USD pair should come to an end. Of course the $64k question is when? The EUR really should be trading at or near parity to the dollar, but it may take the literal collapse of one or even two of the weaker brethern of the EU before that occurs.
currency strength and weakness are monetary
phenomena - not economic....the ecb has not
been as hell bent on currency debasement as the
fed - i.e. they have not pursued qe as
zealously as the quack bernanke. as long as they
are less enthusiastic about it the euro will
show relative strength regardless of what their
economies do.
Higher allocation of foreign reserves in EUR and a lower allocation in USD has become a trend that data can back up...anecdotally (i'm not an fx strategist, but read a lot) there has been a high level of Asian demand for EU memeber agency bonds.
RE the Europe mess, see John Mauldins letter this weekend, he sent it about an hour ago.... ""Europe's banking system is in far worse shape than the US system. The losses may be bigger, and their capital to meet those losses is certainly less. Let's look at some charts. Remove sharp objects or pour another adult beverage.""
John Mauldins letter this weekend, he sent it about an hour ago.... ""Europe's banking system is in far worse shape than the US system. The losses may be bigger, and their capital to meet those losses is certainly less. Let's look at some charts. Remove sharp objects or pour another adult beverage.""
and that ladies and gentlemen is why the euro is being propped up.
Care to email that to me? cornelius at zerohedge dot com
Waiting for 1.45 to whack it.
Or maybe people are viewing paper currencies as a more risky medium to store their wealth - and not without reason, I might add - than real stuff such as commodities, and of course the actual and ultimate safe-haven of Gold. I think the next black swan is headed for the currency markets.
I like to avoid the crowded trade - speccy money is very long and leveraged the re-inflation commodity trade.And China are building/hording for a world that doesnt/wont exist.
The next black swan is a further set back to globalization. Peak credit was 2007 ,peak Globalization 2008. Like the big bang theory , we have 3 choices now : the global economy keeps expanding (fail) the global economy stays constant (unlikely) the global economy shrinks and keeps shrinking (my vote)
Asset prices are just numbers being manipulated on a screen. The stock market is a game that isnt needed any longer. The baby boomers are cashing out and generation x , y etc dont care about stock option plans.
Big cultural , social and demographic changes ahead. The new normal is going to be a big freaking surprise to the like of Goldman.
Currency markets are zero sum and do not forget the power of manipulative central banks an govns. They'll whipsaw commodity prices and fx levels to suit their needs, including gold
You want a safe haven? PAY OFF YOUR DEBT , PAY OFF YOUR MORTGAGE. If you still have savings , BUY ANOTHER HOUSE/LAND.
Yup , we have come full circle.
August 2007 was only yesterday and this dark day is not over. One morning we will again wake up to the news that the Asian markets have collapsed and the realization that the world economy has vaporized. "Risk aversion" will be the buzz as black swans make the day seem as night.
A massive top is forming, but trading the EUR/YEN is as difficult as any now - wide stops and small positions for those who want to survive this dog and pony show.
EUR/YEN 115.00 by the end of the year.
My only doubt is whether my account balance survives all the random BS in the meantime.
John Mauldin's article - Europe On The Brink is here.
http://www.safehaven.com/article-13946.htm
In my opinion the euro is an accident waiting to happen. I have no idea why people are buying the thing. Here's the irony, with everybody looking for a currency crisis in the dollar or in sterling, it would be just like the markets to serve one up elsewhere. I suspect there is at least a 20% crash coming for the euro as the euro banking system unravels, hell it may even be 30% plus with euro/dollar parity on the cards.
MD