The Dollar This Week

There will be a Hungary story in the papers tomorrow. If you read ZH
you know that already. I hope no one was long the Forint.

I don’t know what to make of this story. On one side you could say it
looks bleak. It appears that the IMF is playing hardball. This from
Christof Rosenberg who runs the IMF mission for Hungary:

“Our
talks with the Hungarian government have been interrupted as we have not
been able to find enough common ground and there remain too many
unresolved issues to take this review to our board”.

"Interrupted" is about as strong a language as the IMF uses. Normal language might be; "Take it or leave it." Bad news
there. The other side of this is, “what are the fighting about?”
It would appear to be nothing, and therefore resolvable.

Hungary’s
government tried to persuade the fund to accept a deficit target of as
much as 3.8 percent of GDP for 2011 instead of 2.8 percent. (Bloomberg)

So the flap is about whether Hungary can be at 3% or 4% deficit. That’s
interesting. The US is around 10%. Most of Europe is currently double
the IMF target as well. If the US were to impose measures that limited
our deficits to 2.8% we would implode in less than one year. There would
appear to be a fairness issue inside of this. After all, the US has the
largest vote at the Fund. And it is also the biggest deficit spender.

The dollar closed Friday at some very interesting levels. I
called the long DLREUR trade a “rat trap” six big figures ago.
But I am quick to admit I did not see this big a move in the cards. My
comments on those closing numbers:

YENDLR at 86.55. This is a toilet bowl price. This is
screaming short dollar. It is a terrible trade. It does not matter. This
looks lower to me.

DLRCHF at 1.0514. Look at this thing on the charts. Now
put the macro story on top. This could easily go to par. It has not held
that level before. This time could be different.

DLREUR at 1.2908. What can I say? On paper you could argue
1.10. But the market says no. And the market is still long dollars. To
get this market net short of dollars would be another 10 big figures up.

So that gets us back to Hungary and the next day or so. Six weeks ago a
bad Hungary story (this is a bad Hungary story) would have
resulted in a big pop in the DLREUR. The CDS spreads would have all
widened and the MSM would be talking about the demise of the EU.

With that in mind it would not be at all unreasonable to expect a pretty
good-sized reversal off of Friday’s numbers tomorrow. Given the
complexity of Europe’s problems the Hungary story may refocus the
market’s attention and the Euro could move back to the low 1.20’s over
the course of a few weeks. If you were a dollar bull those closing
prices had to look pretty good to get long. And now there are headlines
to support it.

It could also go the other way. Surprise, surprise we may find that
there are still plenty of dollars on offer and the bad new on Hungary
does not stick. That would be a very significant change in how markets
react to news. Call that sentiment. How this can change so quickly is
always a surprise to me.

We are at one of those inflection points that is worth noting. Either
the dollar will start to reverse back to a stronger trend (this is a
pretty good test for that) or it is going a hell of a lot lower
than we might have thought possible.

Like I said, the weak dollar is not the logical outcome. Therefore the
probability of it happening is high.

Comments

[nuinut]

So the flap is about whether Hungary can be at 3% or 4% deficit. That’s interesting. The US is around 10%. Most of Europe is currently double the IMF target as well. If the US were to impose measures that limited our deficits to 2.8% we would implode in less than one year. There would appear to be a fairness issue inside of this. After all, the US has the largest vote at the Fund. And it is also the biggest deficit spender.

Seems obvious to me that the Hungary story is simply Uncle Sams attempt at halting a continuation of Fridays markets. More smoke and mirrors.

[RoRoTrader]

It is strange. Making an announcement over a weekend like that just light weeks past and Sunday markets would have opened with big gap downs, so it looks calculated.

And, the stress tests are too much of an opportunity for officaildom to blow, much like the trillion $ bailout.

Some of the talent and brains at ZH can probably collaorate to write the script for the next Broadway hit entitled, "What Was I Thinking? Personal Diaries Of The World's Central Bankers."

[rotsevni]

DLRCHF number is upside down and the chart should be labelled DLR/CHF

[Bruce Krasting]

This chart shows that the CHF is now worth about 95 cents US. It show that the Franc has touched on parity twice in the past few years. So we understand eachother. I think the CHF will rise in value and go to parity.

You like to look at the Chf as 1.05. Fair enough. I think the dollar will fall from 1.05 to .9996.

I like my graph.

[rotsevni]

The graph is fine.  But it is mislabeled.  The label says CHF/DLR.  One gets 1.05 CHF/DLR.

[RoRoTrader]

Not to belabor the quote, but it is a futures contract quote for the Swiss Franc, 0.9500 (crossed against the dollar, not explicitly stated as with spot FX, ie., USD/CHF). The symbol for the futures contract varies from dealer to dealer but probably looks something like SFU10 - Swiss Franc, September contract expiry (90 day duration), 2010.

Same for the Yen and Cad futurres contracts.

The spot fx quote is the inverse; USD/CHF @ 1.0525.