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A Great Short is Setting Up for the Euro
My guest on Hedge Fund Radio this week is Marc Chandler, the global head of currency strategy at the esteemed Wall Street firm, Brown Brothers Harriman.
Marc says that the next big focus in the foreign exchange markets will be a strengthening US economy and another slow down in Europe. After one last gasp, that could take the euro as high as $1.45, and a great shorting opportunity will set up that could take it as low as $1.10-$1.15 next year. We won’t see parity until the Fed announces a convincing exit strategy from its monetary easing, which is some time off.
Strong US growth in Q4, 2009 and Q1, 2010 combined with a major European identity and debt crises in the spring prompted many to predict the end of the Euro prematurely, the spot trading all the way down to $1.17 and change. But then a combination of innovation and institutional reform and a bout of weakness in the US saved the day, taking the European currency back up to $1.40.
But its troubles are far from over. The US elections will remove much uncertainty from the dollar just when American growth is reasserting itself, opening the way for another down leg in the euro. A double dip recession, quantitative easing, and better news in Europe are now fully priced in.
Quantitative easing is virtually a sure thing, thanks to a weak US economy. Banks are earning a risk free 25 basis points lending their money back to the government, so money is not making its way it to the main economy. Corporations are cash rich and don’t need to borrow, while small businesses don’t fit into a de risking, deleveraging world.
A lot of the good news is already known for the Australian dollar, including the interest rate differential, the health of the banking system, the commodities boom, and exploding trade with China. The market is running a large long position, and the next piece of positive news, like another interest rate rise in November by the Reserve Bank of Australia, could trigger a bout of profit taking.
The currency war is a myth, a media concoction, and is just rhetoric to get China to revalue its currency sooner. We are not seeing the downward spiral that brought drastic measures, like the Smoot-Hawly Tariff Act of 1930, which enforced severe restrictions on international trade during the great depression. Still, the currency markets are an arena where nations slug it out to pursue their own interests. Marc thinks that if China really allowed a free float, appreciation is no sure thing, and in fact the Yuan might sink.
Global investors are cashing in on this conflict by buying emerging market equities and ETF’s as a proxy for their currencies, such as in South Korea (EWY), Singapore (EWS), Indonesia (IDX), and Thailand (TF), which are often hard to buy outright. Local central banks have tried to lean against flows, so far, with no effect, some of which are now being driven more by fads than by serious fundamental research. This is planting the seeds for the next crisis.
Marc reveals his most valuable forex trading rules, including keeping tabs on interest rate differentials, monitoring global capital flows, and careful technical analysis, looking for the driver, the direction and the degree on the next move. The people who reliably make money over time are the more disciplined risk managers. You have to draw the line between a good risk/reward ratio and simple greed.
Marc has an undergrad degree from the University of Northern Illinois in history and a master’s from the University of Pittsburgh in international political economy. He has worked as the currency strategist at HSBC Bank and Mellon Bank, moving up to his current post at Brown Brothers in 2005. Last year, Marc published a book entitled Making Sense of the Dollar: Exposing Dangerous Myths About Trade and Foreign Exchange. In his free time, he teaches classes at New York University.
To listen to my interview in full with Marc Chandler on Hedge Fund Radio, please click here at http://www.madhedgefundtrader.com/october-12-2010-marc-chandler.html and hit the “PLAY” arrow. If you want to learn more about Marc’s FX research product, you can e-mail him directly at marc.c.chandler@gmail.com . To buy Marc’s insights on the basics of trading the foreign exchange market, please click here at http://www.amazon.com/Making-Sense-Dollar-Dangerous-Bloomberg/dp/1576603210/ref=sr_1_1?ie=UTF8&qid=1286822013&sr=8-1 ).
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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Where's Orly?
1)Currency wars are more real than not because Japan and Brazil took real actions, that had real consequences, and cost people money.
2)China has also made strong comments on currency that indicate extreme displeasure, which have real political and diplomatic consequences.
3)The Euro is in jeopardy of even surviving with Ireland, Greece and Spain cracking up and the "stress tests' apparently bogus. Short is good.
Dreaded Triple Deschmetty Omen: When 3 facts randomly strung together stick like a booger to a key pad, they are not random, so proceed with caution
.
Is this a sure thing like the short of the century was a while back from MHFT for treasuries? That worked out. I guess if you recommend enough shorts at least one of them hits by sheer happenstance.
U.S. "Bucket Shops" are effectively closed down with the new FinReg margin requirements. Must be a really big move coming.
Hi MadHedfundTrader, first time writer, long time reader. I'm a huge fan of your work!
Hey, I was just wondering: A few months ago, you wrote the following with respect to the yen:
"There is another vulture circling over the yen. When all of the angst about Greece resolves itself, the world’s credit sharks are going to hunt for a new victim. They’ll be looking for a country whose soaring debt equals 100% of GDP, suffers a terrible demographic outlook, and pays zero interest rates. Using these criteria, Japan looks like an incredibly ripe piece of fatty blue fin tuna sushi. This is why credit default swaps on Japanese debt have doubled since last summer.
Of course, I only speak Japanese, spent a decade living in Japan, another decade running a Japanese prop desk, a third decade managing a Japanese hedge fund, and published three books on the Japanese financial system, so what do I know? But if I’m right, there is a baseball sitting on top of a T-ball stand just begging to be smashed out of the park.
Look for the yen to move to ¥95 very quickly, then ¥100 to the dollar in months, followed by ¥120, and ultimately ¥150. If you want to get into the beginning of a major trend, instead of the middle, or the end, like everyone else, this is your big chance. Buy the short yen ETF (YCS)."
I plowed in just like you said MadHedgeFundTrader! Sure, with the yen now about to break 80, it's not working out exactly like you said. But I still have faith and I just know it's going to turn around!
To be honest, though, the 2nd job I'm working to meet the margin calls from this trade is starting to wear on me. Additionally, my wife left me last weekend when she found the foreclosure notice and realized I had been using mortgage money also for the margin calls.
So...I was wondering: If I cash out my 401k and go "ALL IN" on this Euro call, do you think I might get back a portion of these yen losses? I would appreciate any feedback you might have on this MadHedgeFundTrader. It would really mean a lot.
I think there's a reason he calls himself "Mad Hedge Fund Trader." It's a clue to his readers that he's not exactly making high-probability, low-risk calls here.
Bitch, please!
+100
ROTFLMAO!
Zimbabwe is the new buzzword...If Art Cashin agrees with my Zimbabwe analogy, then I am (somewhat) comforted...
http://www.youtube.com/watch?v=mM3_z2RB3YU
Stocks for the long term!
madhedgefundtrader: Any views from him (or you) on CAD or CHF?
I think we will see a name change to brokehedgefundtrader soon
call the nurse, this patient made a mess again.
still blubbering...
alx
That right there is a trifecta of crazy. The double dip is priced in with the Dow at 11k? QE is priced in unless it doesn't materialize. I don't think anyone is expecting the QE to be a remedy for the Fraudclosure mess, but merely an unemployment fixer. And the currency war is a myth? Come on man.
Anyhow, it's Monday, that means everyone needs some music to get the week rollin. Here is my answer to Steak's call for playlists (music this time, not comedy):
Steak and Shake:
http://www.youtube.com/view_play_list?p=438A49417E0A53F7
At least a strengthening of the economy of US FX bucket shops.
Strengthening of the US economy? Am I missing something here?
Y
Yes, you and I are missing something here ... I think its a drug which elicits hope and helps read statistics the way you would like. "Hope is a whore, she gives herself to anyone" ... Danton
DP
If you believe the current churn to 1.41 EURUSD is sustainable then please revisit the EU and all of its problems.
Yes the USA has its fair share of fiscal problems, but this is a case of one's shit simply stinking more. Or, in this case, 25 country's shits stinking more than the sole USA.
Id like to see a revisit to 1.19 hopefully by end of year.
It must have been Tequila weekend and last night he mistook that flashlight from a cop when he got pulled over as a sign from god to start shorting the Euro.
A least it sounds better then a chimp doing stock picking...
EURUSD to 1.50 destroys German exports and annhilates the crisis riddled periphery ...
EURUSD 1.40 is already putting the kabosh on.
I saw Antonio Banderas on the train advertising a beautiful beach resort in Spain and next to that another ad showing a beautiful geyser in Iceland ...
EURUSD is a short ...
I'm not losing too much sleep trying to figure this relationship out. It seems the last time the EUR got clobbered, my PMs went up. If the USD drops more than the EUR, my PMs go up. If they both drop in a race to the bottom, my PMs go up. If they both go up in a race to the top, well..., I'll be dead from the shock anyway.