is at 1.2275. It is not surprising that the Swiss is strong against the
Euro. The SNB has let the cross go. They were last seen at 1.40 where
they made a big stand. But to me it is surprising to see this sharp
appreciation of the Franc while the dollar lost 3% to the Euro. Proving
once again that the business of forecasting FX markets is tricky stuff.
The Euro was (is?) oversold. The open short interest has been cut
sharply in the past 10 days. There has not been any “Really-really bad”
news out of the EU either. In fact some of the austerity talk seems to
have traction. Austerity is a popular theme. So the back up in the Euro
is justified.
It’s easy to predict that there will be more bad news from the EU in the
next few months. With that as a backdrop the current market level looks
attractive to shorten up on the EUR/DLR. But I am smelling a rat on
that trade.
It was not that long ago that the short dollar trade was popular. The
reasons were obvious. The US fiscal issues were overwhelming. Growth
prospects (I think that relative growth drives FX) in the States was
questionable. That was six months ago. What can you say about those
issues today? Nothing is being accomplished on the fiscal side. Bernanke
intends to continue ZIRP forever. Everyday we see new evidence that a
slowdown is likely in the months ahead.
The fact that the US will not even raise the issue of an austerity
budget until 2011 is going to become a drag. With all of Europe’s
problems there is evidence that they are coming to terms with their
budgets. In the US it is still full steam ahead. This week we may get
another $50b to extend unemployment and keep the states alive for
another four months. As many have recently pointed out, the municipal
finance problems in the US could overwhelm the bad news from the EU.
That story is going to explode as of July 1.
We are at an interesting juncture in FX. Either the trend to a weaker
Euro comes back into line soon or we may have a surprise ending. The
appreciation of the CHF against all currencies is a sign to me that this
is a market against the dollar, not just the Euro crosses. While it may
look tempting to re-short the Euro it could also be a trap. Keep your
eyes on the other crosses. If the Yen/DLR weakens or we see a decisive
breakout in gold to the upside look out. The weak dollar carry trade
could come back into vogue.
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mephisto said: "I think austerity budgets, that are believed (ie UK), should strengthen a currency and hurt equity."
An austerity budget in the middle of economic weakness is the IMF's Kool-Ade, and it never works. The additional plunge in economic activity blows a hole in the revenue assumptions, and the deficit gets bigger instead of smaller. Any government stupid enough to then do Austerity Round 2 gets voted out, or thrown out by a street mob.
Watch Ireland come apart as the canary in the coal mine for the austerity path. The big economies in danger are Italy and the one no one talks about, France. But the big bank systems in danger are Switzerland and Austria. Remember that after the bankruptcy of Vienna bank Kredit Anstalt in May 1931, Italian banks followed and all Europe started falling like dominos. Kredit Anstalt was reorganized and eventually merged into today's UniCredit. UniCredit is a pan-European bank operating in 22 countries with over 40 million customers. Their core markets are Italy, Austria and Southern Germany, but they are probably the largest lender to Central and Eastern Europe, where the wheels are coming off several economies pretty quickly. So maybe it's Kredit Anstalt 2 that takes the world down again. Incidentally, their investment banking operations are in Munich & Frankfort.
Did the SNB just come into FX arena? Look at USD/CHF.
I think Bruce is super good with his FX analysis, but it looks pretty hairy here to me. I wouldn't be messing with this shit right now unless I was George Soros or something.
You are right. There is more risk than reward. I did this for a living at one time. When you are wired in a money center bank you have a chance to succeed on a regular basis. But retail investors stand little chance. My advice, don't bet on FX unless you can hold your breath for two minutes. Very few can do that.......
It looks as if the euro support is a strictly market- sentiment- driven short short squeeze. The ECB is quantitatively easing. Good for what, exactly? So mch for fundamentals!
Dollar value orbits around the (fundamental) dollar/crude trade. In our mechanized world it is the only trade that matters. The gulf states have given the euro the bum's rush so the votes on the euro that really matter ... are in.
That oil prices cannot rise in dollars (for various reasons) demonstrates value; priced in oil dollars are worth something. That makes both the dollar carry and dollar short derivatives trades very risky. On the other hand, declining oil prices (against a peak oil backdrop) suggests that oil customers are quietly going broke, more of them every day. This takes dollars out of circulation (and increases credit risk) amplifying the 'going broke' cycle.
As more and more traders recognize dollar value there will be the exit from the euro regardless of sentiment. The euro rise was a carry phenomenon, in my opinion, just like the S&P rise. Oil priced in euros will become very expensive and there will be an energy crisis in Europe. (If BP cannot cap that Gulf gusher, there is likely an energy crisis in America, too.)
Wait a minute. Is the rat trade going long or short the meatball?
Thanks Bruce, enjoyed the article.
I think austerity budgets, that are believed (ie UK), should strengthen a currency and hurt equity. Without such measures, the other way around. So the policy differences across the atlantic have stabilised the EURUSD, but only because USD has weakened.
I dont like to use CHF as a clue to overall sentiment. CHF strengthening can simply be the market tentatively finding a fair value now everyone at the SNB is on holiday in Greece spending the Euros they bought.
I prefer your last 2 points - I use JPY and Gold.
the only thing I am convinced of is manipulation.
treasuries should have gone down more. since we had the best international run in 11 months the past few weeks. which means primary dealers can dumpt them easily taking a profit to prop up the market again.
each moring the futures are higher desepite sell off in europe and asia. this didn't used to happen, so I know this is where the manipulation is happening.
The oligarchy is disgusting. notice we do'nt have down side break outs, but we should have had a treasury break out.
UGH. the market has become a big game.
It is, and has always been, a great big game.
I trade from Europe. I used to watch the late ramp jobs (8pm-9pm in London) with disbelief. It ruined my days, pissed me off, annoyed my girlfriend... I started to try to sell the squeeze at 9pm and buy back in the London morning. It worked, overall, but I wasnt exactly sleeping well.
Now in June fear seems concentrated in the US, greed in Europe. So in NY you have late selloffs and open higher. It will continue until the mood changes round.
I watch the FX market, even though I dont trade it much. I use it as a clue for where the fear is, and I think that has a big impact on these intraday dynamics.For example, I think Europe is comfortable as long as EURUSD > 1.20, and NY can usually be bought at the close.
Good luck shorting treasuries. I think one day you will be spectacularly right, but not yet.
Hope this helps
I'll take the rat trade for today.
don't you think bad news from the US will still take a while to hit markets? too much going on right now and the EU's not sorted out yet..
That's only if you are interested in spending your money gambling on which bad news will hit markets first.
The only thing I'm certain is that bad to worse news are going to continue hitting markets, whether out of the Eurozone, the US, the UK, Japan, China, etc...
But anybody who claims he can predict in which order they will hit markets is a snake oil salesman.
Just try to find someone who predicted the Dubai, Greek and BP GoM fiascos in that order. Know anyone who has a crystal ball that works?
Yes, fair point. So how do you trade on this? Go short all, expiry 2012 maya style ?
Thank you for the HU, Bruce.
I was watching prices around 2AM ET, and empty 1 bottle of ww. Just after I read your article I noticed prices were not behaving the way I wanted so dumped all of the positions........lost some money on the USD/CHF and made some on the rest. Best performer was the AUD/USD short. Got lucky on the exit for AUD/CAD.
That is a twist in the context of;
LIBOR http://www.zerohedge.com/article/t-minus-7-days-libor-induced-liquidity-...
And the coming Dow/SP500 50 and 200 SMAs death-crossover looming..
Anything is possible and nothing impossible scenario. Trading is beautiful and cruel. Mostly cruel.
Afterthougt; really, why make it so fucking hard. I have problems enough with the math questions to get to the Comments so how do you think I feel when I read RAT and am short AUD/USD, AUD/CAD, NZD/USD and long USD/CHF (stops to contain the risk) weighed against all of the other material at ZH such as Looming LIBOR and Nick Lenoir Death Crosses for the SP500.
Terrific stuff.
Btw.......and what if Switzerland really is bankrupt? What then? First surrounded by the Euro and then suddenly swallowed by it?
Also looking for informed discussion of implications for FX/commodity pricing of the China curreny maneuvers, notwithstanding the obvious G-20 politics.........anyone, please and thank you?
Bruce, I see your arguement as sort of shifting the focus from bad to worse. So, where does that leave China, if no one can pay?
I think the Swiss are shitting bricks over the fx rate, because they have a huge loan book to Eastern and Southern Europe. All the debt addicts used CHF for funding as a way of cheapening the interest expense so they could borrow more. Now the Swiss banks have a horrendous credit - fx correlation risk. Bank assets are multiples of GDP, so the impact of this correlation on capital could be catastrophic. Seems to be, this idea of CHF being a safe haven overlooks the interconnectedness of the global financial system...
What? Am I a leper? No fb?
Here's a starter; Yuan 50% Undervalued against dollar - Credit Suisse
Hey Bruce, where did the Stuy story go? LoL! What's up?
Have to agree as 30 min chart showing Head and Shoulders top potential from 1.224 - 1.2465, measures out 1.205 upon a break of 1.224. Current is 1.2258.