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On FX – Who to Trust?
French President Sarkozy on May 7, 2010:
“We will confront speculators mercilessly.
They will know once and for all what lies in store for them.”
They will know once and for all what lies in store for them.”
But it has not worked out the way Sarkozy planned:
Sarkozy changed his tune on June 4th:
“I see good news from the current
euro-dollar rate.”
euro-dollar rate.”
This is a good example how things can go wrong when an elected official
(who has no understanding of markets) speaks and acts rashly. Basically
Sarkozy said, “Bring on the wolves!” And wolves came and
ate him alive. Angela Merkel is no different. She initiated a freeze on
shorts and restrictions on CDS. The German markets have been southbound
ever since.
So the heads of state of the two critical countries in the Euro drama
have made things worse not better. At this point the Wolves have a nice
wad of cash in their pouches and they are still very hungry. They are
more dangerous than ever.
On the other side of the Euro ledger is the ECB. They have bought a
modest amount of troubled sovereign bonds so far. More importantly the
have borrowed in the public markets to finance it. This is not QE by any
means.
There must be a fair bit of pressure on J.C. Trichet to open the
floodgate and print money. Tim Geithner has been breathing down his neck
with the, “Do it Big and Do it Fast” plan for more than a
week. That J.C. has resisted this step is one reason to be optimistic.
At some point the resolve of the ECB on the anti QE issue will
translate into confidence. Heaven help the Euro zone should they waiver
and open the printing presses. That mistake would take many years to
fix.
If you follow FX you should ignore what the elected officials are
saying. If anything, trade against them. Focus on the ECB and what they
are doing. In this case they are doing nothing for the Euro. There have
been rumors and suspicious market moves that make it possible that the
ECB has been involved with sub rosa currency intervention. It is my
belief that they have not been in the market. Based on that I conclude
that the ECB wants the Euro lower. It would provide a big boost to the
entire region. It is very beneficial to the German economy. At the end
of the day that is all that matters.
It should be an interesting week. Another five days of losses for the
Euro without a visible response from the ECB would confirm the policy of
‘orderly retreat’. That could set up a summer of weakness
for the Euro and across all markets.
»
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Euro depreciation is exactly what Eurozone needs now. This will impact Dow companies who did not hedge for these big moves. Also, it helps European debt (by cheapening it).
By the way, Bruce, are you sure the politicos weren't playing the big hedgies? Maybe Sarkozy isn't as dumb as you portray him.
Dow stocks Leo? Check again. It is most of the S&P 500.
How does EU debt get cheaper by this? The EU has lots of dollar debt. That debt just got 15% more expensive to pay back. As for the Euro debt that is unchanged as well. So no cheapening as far as I can tell.
The weaker currency will help them no doubt. But at whose expense? The USA of course. We are losing a big global advantage. That plan to double exports? Forget it. We will be lucky if we don't lose ground.
Tks for checking in. I hope you're not bruised today after the weekend mauling. From the ZH stories you are in good company. Both GS and MS are bulls.
For what it is worth I have very few irons in the fire. I am a very long term holder of gold. But have not added to it in months. I have cash. I love it and hate it. My dream:
The Euro goes to parity or worse. The shit hits the fan on the PIIGS. It will look like the end of the world. Spanish/Irish/Italian Euro 10 years will be trading at 70% of par with monster cash on cash yields. I will buy all I can afford to and then sit back and wait a bit.
All that is happening today will come back to the US. It is less than five years away. We are going to look like England times 10. Europe will not disappear. They have survived much more than deflation. My home run would be to buy Euro bonds and take a big cap gain as they trade back to par, earn a big coupon and make 50% on the exchange rate. I think it is going to happen. I just wish I could figure the timing.
bk
PS My best ever trade? Bulgarian bonds with three years of interest attached at 6 cents on the dollar. 1989. Timing is everything......
Your thoughts on the EUR sov trade are right. No way of knowing the exact right time, but at these yields and this FX rate, you don't have to get it exactly right to make a nice amount nevertheless.
Bruce,
Spoke to my buddy who's been trading currencies for over 23 years. Some interesting feedback for you:
1) On S&P 500 companies who hedge currency risk, he thinks it's very low (like you). He also told me, of those who hedge, they probably did a lousy job of properly hedging.
2) Canada is a one-trick pony: commodities. He told me the Canadian dollar is 1% off its all-time high relative to the Euro and Pound.
3) Demographics are god awful for developed nations. Euro parity will happen and debt problem will get worse, not better.
As far as the US being the next England, have a look:
http://blogs.sacbee.com/capitolalertlatest/2010/06/schwarzenegger-173.html
cheers,
A battered & bruised Leo
(just kidding, love getting into it on ZH)
Spain 5- and 10-y yields now at pre-bazooka levels. It's evidence that fiscal authorities have zero credibility.
Somebody spin me how this is a good thing...
Used to be called: "The purest market with the most liquidity"
Now just another room in the big casino.
The first countries to devalue win in a global downturn. That's because any funds you draw from exports are funds you don't have to monetize to pull yourself out of the downturn.
The same thing happened during the Great Depression, the only difference was that it was easier to devalue because all currencies were referenced to gold, so all one had to do was lower the (fixed) exchange rate of one's currency with respect to gold.
Which is exactly what FDR did once he had confiscated all the private gold holdings in the U.S.
I understand why Tim is angry. Imagine you have to pay back all the stimulus with a stronger ccy?
Ouch!
I think when Sarkozy talked about speculator he didnt mean FX speculator, but (sovereign´) bond speculators. His long term stance on euro was/is that euro was/(still is?) overvalued. He doesnt see a problem with parity. But I agree with you, I dont think euro will drop to parity, it will most likely fluctuate in $1.1-1.2 band for few years and after that perhaps in $1.2-1.3 band. But who knows?
I don't buy this - at least not completely.
The ECB is funding their sov bond purchases with 7 day deposits - of the liquidity that the ECB itself provided with their 1 year tender! The 7 day deposits are auctioned for a few bips above the overnight interest the ECB pays on deposits. The resolve to reel in the 1 year repos is less that iron, too.
How does this materially differ from what the Fed is doing? They have and ocean of liquidity, tied up on deposit with short term interest payments, which they will reel in "later, much". At least they're honest about it. The ECB gives dates for the withdrawal - with a precision far exceeding accuracy. How is this more credible?
Both have arrived at the same solution for toxic debt of all kinds: the Central Bank as the "bad bank" of last resort. The gimic of interest rates paid of CB deposits is all that prevents the toxic assets from becoming toxic liquidity. For now.
The ECB is a bit more elaborate with the three card monty, but it's the same hustle.
agreed.
I agree, ECB is just a shill for German mercantilism.
How can Germany prosper when its neighbors -who it relies on for market expansion - are broke?
Who are broke because of German mercantilism?
The ECB is simply recycling liquidity.
bruce, i absolutely agree with the premise of the article (look no farther than a few of the 'coincidental' crashes that popped up when the US senate/house were discussing financial regs, etc.)
but...
much like a 'reassuring' captain at the helm of the Titanic, i'm sure he was calling for all kinds of 'fixes' as the ship went down in spite of his valiant efforts...
i'm not sure that the recent merkle/sarkozy posturing wasn't more a *reaction* to the inevitable, vs. the cause.
hell, i'm not sure that our own fearless leaders haven't been 'reassuring' us the same way for the last year.
Ron francis Paul???
Everyone wants their currency to depreciate. (currency weakness)
Everyone wants to export their way out of trouble, to generate "growth": not mutually attainable. (See "currency weakness")
No one wants - or can afford - rising interest rates. (Go straight to "currency weakness")
No one can seriously ever cut government deficits or spending, for poltical reasons. (Go directly to "currency weakness")
...so what gives? How is this going to be reflected in the markets? When every fiat paper currency is getting weaker and weaker as the months and years go by, where does it show up?
Answer: in items of comparative scarcity. Gold. Metals. Food. Agriculture. Health care. Education, Transportation. Fuel. Oil. Maybe (select) real estate.
We see PRICE INFLATION. NOT, NOT, NOT!!! because of "economic growth", but because of currency weakness.
Just keep invested in the right stuff, bought on dips and held long-term.
kredit, you are so smart. and so good looking. i feel like i know you. have we met before. lets get physical gold and silver. wait for everything else to drop.
Excellent observations.
It is up to the commodity providers to decide which colored pieces of paper will, in the future, continue to purchase finished goods.
The key is this: No commodities are delivered to market without oil.
Whoever protects, brings pressure to bear, and appeases, the large oil producers controls all other commodities and whoever produces them.
Watch oil, all else is distraction...btw, oil producers prefer gold and are fully aware of how easy printing 'money' is...since the print their own local currencies.
Updated DOW charts:
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
Well, he is FRENCH, so what else is there to say?
Je ne suis pas d'accord. Les Français ne sont pas enchanté de lui non plus.
Typical Sarko. All hat and no cattle. The guy's a self-aggrandizing fop.
We need a St Francis to go out and have a conversation with those wolves. Barack?
/sarkosm off
Euro-TARP: Sarkozy IS a Douche Speculator
Euro-TARP is nothing but a forced taxpayer bailout of TBTF French and German banks who made idiot loans speculating for higher returns following the trail of Goldman, Citi et al frauds on the continent.
Sarkozy is a pandering Douche Bag a la Geithner, Paulson Stick the Tax Payer for Bankster Fraud and Stupidity Express...
Did I leave any one out?
I have a new theory!
Yeah. I was friended by a high school classmate on FB. Anyway, she has other former classmates as FB buds.
And quite a few have made it up the foodchain.One is a former managing director of a huge Manhattan Investment bank name you would know firm, now he is a managing director of a subsidiary that is buying up distressed banks from the FDIC.
Another guy made it big in the music biz.
Anyway, these guys were the most nebbishy, nerdy, dweebs in the lunchroom. Annoying and socially backward kids. Just not cool.Braniacs, but social rejecs.
So, ahem, my theory is that when they get to grown up land and they successfully number crunch and ass kiss into positions of power, they never get over their lunchroom hurt.
But now they are the big shots at the table, and they have a burning need to punish everybody. And they do. They are now sociopaths who carry hurt and love the taste of revenge. And they get their revenge by crushing everything and everybody. And by marrying and/or screwing the hottest chics around. Women who would have walked past them in the lunchroom and not knowing that they existed. So, they have to hurt those women, too. I'll bet S&M figures significantly in their attempts (yes attempts, I don't think these attempts work much) at sexual fulfillment.
Sad, but at the same time their sociopathology if fucking things up seriously for everybody else.
west coat commentators are late to the party on all discussions
west coat commentators are late to the party on all discussions
Trust the Kroner. The Norwegian gov't posted a 9% plus budgetary surplus in 2009. Can't recall the last time the US did this; and anyone who says 1999-2000 needs a lesson in 'hocus pocus'
Regards
a couple of months ago it was trust the loonie and the aussie. paper is paper. stick with physical gold and silver.
"a couple of months ago it was trust the loonie and the aussie. paper is paper. stick with physical gold and silver. "
Oh so agreed breezer. But in line with the post's title of "FX who to trust', and if I was forced into picking a fiat to play long, it would have to have a gov't backing it that wasn't running deficit after deficit. ie. less reasons to print more. Loonie and Aussie are out years ago in that case, and the German Mark isn't back on yet. But endgame will always leave me on the same page as you, definitely.
It is hard for economists to understand that politics is what created the Eurozone, not economics. Despite the debt, there is still a lot of political will to keep the Euro afloat, and that's vastly more important in Europe than it would be in the US.
Its all being orchestrated. Please remember politicians lie easily.
Kudos to Europe to take their medicine now. While our boobs are practicing for the World Cup can kicking competition. For some funny reason I get the feeling that the Franks and Visigoths will be laughing last and the loudest. JMHO
Nope, I rather be U.S.A than Europe. Especially when Katla blows.
one word... Yellowstone.
If that thing blows the people closest to it will be the lucky ones.
So in your opinion is a $.80 - $1.00/Euro a rate which "would provide a big boost to the entire region"? It has certainly been there not too terribly long ago and during part of the 80's the legacy currencies were in that approximate range. What's the risk that fair value is well below that or that loss of confidence drives the Euro well below that point? - obviously the USD is also a moving object, I'm just trying to keep it simple here.
It's hard for me to see far into the future. I am just riding short term trends. I don't think the Euro will get to parity. It is headed in that direction. The fundamentals of the story are bad and will likely to get worse.
But we have to keep in mind that the dollar is a lousy store of wealth that should not be trusted either.
Do Europeans care that much of the Euro declines vs the Dollar? Answer is, not at all, unless the Euro price of oil goes too high. They find a benefit in a weaker Euro for their exports and particularly vs China, which is being pushed towards revaluation vs the USD, but is rising against all other currencies, so they are very unlikely to acquiesce.
The European view is the Dollar strength is mainly due to the global reserve status and they don't see the strength in the US economy that the pundits tout, especially given how large their stimulus was and the meagre "growth" it bought.
Geithner has shown his hand this weekend, he is horrified by the talk of reducing deficits and begging for more coordinated stimulus, because Obama knows Washington won't allow cuts and the US desperately needs inflation to prevent the Ponzi collapsing.
The fundamentals will catch up with the Dollar eventually, so why would the Europeans spend the time and money "defending" the Euro now? Remember, when Germany reunified, the DEM declined, but this brought a healthy boost to exports and the economy came out stronger in the end.
Hey Bruce love your work - would it be fair to say that the pay off diagram from QE is essentially a strong currency in times of crises, i.e. at the worst possible times for exporters and a weak currency in times of plenty. In effect you are big time selling out your future. The USD and Yen would seem to trade this way?
In other words, QE hurts most when your domestic economy needs a weaker currency most
"But we have to keep in mind that the dollar is a lousy store of wealth that should not be trusted either."
+1
kind of a 'least worst' thing, eh?
....yes. Dollar is like the freshly painted whorehouse in a neighborhood full of crack houses.
This gets my vote for "Metaphor of the Day".
I long ago concluded that anything good for the long term economy/markets will drop markets in the short term.
A lower Euro would be a boost for the region? You said the opposite a few weeks back I think. Something about Europeans waking up and finding everything was more expensive, and that this would be bad.
Great article, but I would have loved for it to be longer and a bit more detailed.
And upon further review of your article, pondering Sarkozy et al, I see that the European politicans are no better than ours are.
Meh! Run to gold!
Sarkozy reminds me of Barry for some reason. What is it....
http://www.shoppingblog.com/pics/obama_sarkozy_girl_steps.jpg
barry probably spends more time looking at sarkozy's ass if rumor is to be believed.
Bruce, another excellent article.
As I keep saying to many of the smart folks here at ZH:
Please never leave us!
Dear Bruce. Another excellent article. With a possible rate rise here, the game of beggar thy neighbor is starting to get very interesting and potentially lethal.
this whole fiasco is reminiscent of Soros a la British Pound.
http://www.theatlantic.com/business/archive/2010/06/go-for-the-jugular/57696/
The wolves are going to go for the jugular because they know they are right...