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Guest Post: End of the Euro? Not so Fast . . .

Tyler Durden's picture




 

Submitted by www.hedgefund.net

End of the Euro? Not so Fast . . .

by Bruce Gwyn, Level III Trading

It seems that wherever you look right now, everyone hates the Euro.
Pundits on CNBC, Bloomberg, Fox Business, newspapers, Web sites, as
well as investors and many hedge fund managers say the common currency
is doomed. The argument is very convincing. Profligate spending by the
Club Med countries will force the choice between austerity programs
that risk social upheaval and the breakdown of the common currency.

The outlook is dim and the crowd is clearly bearish on the Euro as
evidenced by the hard selling this year, especially since April. Just
last week the cover of Newsweek had “The End of the Euro” on its cover.
However, as any seasoned trader knows, there’s more than one side to a
trade and when one prevailing view dominates, great trading
opportunities arise.

Take for example the fact that only six months ago, the dollar was
hated and the Euro was revered. The story at the time was that our
government’s massive stimulus programs were working in the short term,
but all the paper printing was killing our currency. With the
Euro/Dollar at 1.50, the highest it had been in about a year and a
half, famous celebrities like Victoria Secret model Gisele Bundchen
were asking to be paid in Euros. Since then it has been on a
precipitous decline to levels not seen since late 2008.

Another important measurement to look at is the COT (commitment
of traders). This actually allows you to see the different classes of
traders and how they are positioning the different markets.

In my opinion it is one of the most insightful reports. After
monitoring this report for many years, certain movements between the
three classes of traders (small speculator, large speculator and the
commercial) can be very meaningful.

We now currently have a change in positioning. The large spec which
began selling the Euro late last year has actually been reversing this
over the last few weeks represented by the green line. That has
occurred as the Euro has fallen lower. At the same time the commercial
trader (red line) has sold into the decline. This is unusual action
because the commercial will typically buy weakness and sell strength.
The winners in this trade have been the large specs, and for whatever
reason, they are now acting differently in a declining market. This is
happening just as the commercial begins to capitulate.

You can see the same occurrence happened in October of last year. It is
always is hard to pinpoint a turn but this action means something is
brewing.

Prognosticating the long term direction of the Euro is indeed a
difficult task, but when trading the markets there are no sure things
and prices never go straight up or straight down. The precipitous
decline that the Euro is currently in can continue but when magazine
covers have it figured out and the winners in the trade are acting
differently while the market continues to move in its favor, this is a
time to take a limited risk for a much larger return.

 

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Tue, 06/08/2010 - 15:12 | 402145 Ragnarok
Ragnarok's picture

Gold has gone up with the dollar, and if the dollar gets slammed it will continue to go up, Euro be damned!

Tue, 06/08/2010 - 15:15 | 402150 Internet Tough Guy
Internet Tough Guy's picture

Someone didn't like the gold headlines, and gave gold a kick.

Tue, 06/08/2010 - 15:22 | 402165 Ragnarok
Ragnarok's picture

Its day-to-day fluctuations mean little as long as gold stays above the major trend lines.  It is a long term survival move.

Tue, 06/08/2010 - 15:13 | 402146 LoneStarHog
LoneStarHog's picture

Another one of these "contrarians".  Damn!  I hate the term and the simplistic view.  History has shown that when a currency crashes, when confidence is lost, it happens virtually overnight.

Good luck playing any FX Monopoly Money Market.

Tue, 06/08/2010 - 15:46 | 402215 Treeplanter
Treeplanter's picture

Would the euro be hurting so bad if it were the world's reserve currency? Thanks to Lord Obama the US is more insolvent than Europe.   I know, contrarians not welcome in Baja Oklahoma, aka the Lone Star State.

Tue, 06/08/2010 - 16:26 | 402313 pan-the-ist
pan-the-ist's picture

Look - the guest poster's argument hinges on the 'fact' that the dollar is strong right now.  It isn't.  It just looks strong compared to other currencies.

Tue, 06/08/2010 - 17:59 | 402515 New_Meat
New_Meat's picture

"just looks strong compared to other currencies."

Yep, sucks less than the others--guess that makes it strong(er) now.  Later? Who knows.

- Ned

Tue, 06/08/2010 - 16:15 | 402280 ydderf1950
ydderf1950's picture

+1000

Tue, 06/08/2010 - 15:14 | 402148 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The time is up on all FIAT.  Best to recognize.

Tue, 06/08/2010 - 15:22 | 402169 cowdiddly
cowdiddly's picture

go ahead you first. Ill be right behind you

Tue, 06/08/2010 - 15:38 | 402193 Trichy
Trichy's picture

The end of the EUR is not a trade. You can't evaluate the the sustainability of the pact by it's crosses, has nothing to do with it. This is a game of the Germans being fed up with the rest of the gang and slowly and carefully positioning themselves for an exit.

If you still want to bet on the Euro, buy German assets. That way you will in any case get paid in Dmark if it all falls apart, as it will. 

Tue, 06/08/2010 - 15:40 | 402196 Treeplanter
Treeplanter's picture

Jim Rogers recently said he was long the Euro.  As a contrarian play.  

Tue, 06/08/2010 - 15:50 | 402223 thesapein
thesapein's picture

Long as in he has money on it or long as in just a prediction? Also, I'm guessing he meant to say medium term, though, maybe, at most, no?

Tue, 06/08/2010 - 16:20 | 402294 nuinut
nuinut's picture

Not the same guy who went long US$ around Nov/Dec too, as a 'contrarian' play?

LOL

Tue, 06/08/2010 - 15:43 | 402206 A Man without Q...
A Man without Qualities's picture

The "collapse of the Euro" is has been imminent since it came into existence.  I suspect the Fed uses their friends in the media to push the message.  Long term, the Euro is a threat to the Dollar and the short term weakness allows the Fed to keep control and America to live beyond its means, even though this hurts exporters.  

I think a lot of big money has a 1.20 area as a target.  Of course, they need to produce research to say it is going further to attract the other side of the trade.  

Tue, 06/08/2010 - 15:45 | 402212 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

What exports?  Are you refering to the dollar?  Because that is the only thing the US exports anymore.

Tue, 06/08/2010 - 15:57 | 402240 thesapein
thesapein's picture

Cool military stuff. We keep sending bombs to the middle east. Everything else war related is shipped to everywhere else.

Oh, and awesome Hollywood blockbuster movies.

(This side of the argument is hard.)

Tue, 06/08/2010 - 16:11 | 402265 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

touche.  can we export Lady Magaga?  Permanently.....

Tue, 06/08/2010 - 16:17 | 402287 ydderf1950
ydderf1950's picture

ipads

Tue, 06/08/2010 - 16:21 | 402299 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Meh.  Maybe now, but I bet next year's release fails epically, along with Apple itself.

Tue, 06/08/2010 - 16:23 | 402305 nuinut
nuinut's picture

China makes 'em, US buys 'em. How is this helping the deficit?

Tue, 06/08/2010 - 16:30 | 402330 MayIMommaDogFac...
MayIMommaDogFace2theBananaPatch's picture

Yeah -- all them Apple laddies and lassies down there in Cupertino are surely putting the component together, harness-testing, packaging, AND shipping those cute little tablets.

Tue, 06/08/2010 - 17:47 | 402488 thesapein
thesapein's picture

Cute, that's like thinking gifts under the tree are from Santa.

China is kind of like our Santa Oz.

Tue, 06/08/2010 - 17:08 | 402422 TonyV
TonyV's picture

We also make the best porn in the world

Tue, 06/08/2010 - 18:20 | 402549 TBT or not TBT
TBT or not TBT's picture

Cal-OSHA is getting involved now though.  Government can screw up anything.

Tue, 06/08/2010 - 15:44 | 402208 CorrelationTrader
CorrelationTrader's picture

alas Bruce you write like Dennis Gartman! But your this view seems to be slightly tepped. Gartmans is way more bearish atleast in his Daily Letter.

Tue, 06/08/2010 - 15:45 | 402213 MarketFox
MarketFox's picture

The structure of the EURO was flawed from the beginning....

So what has changed ?

Everything does trade, especially "public tilting"...

However, it is common that each family if big enough will

have a black sheep amongst them....

 

Tue, 06/08/2010 - 15:45 | 402214 thesapein
thesapein's picture

Peter Schiff also made a prediction last week, that the euro's demise was a head fake, in a sense, and that the dollar will get hit before the euro falls much further. He's not gambling on it though, either way. His gamble is against both currencies.

I think we're all guestimating right now.

Tue, 06/08/2010 - 16:22 | 402301 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Sort of like Time's Man of the Year?

Tue, 06/08/2010 - 15:59 | 402219 bingaling
bingaling's picture

well- looking at the fundamentals the only thing that I can see is US gets the second leg down. Bernanke prints and money flows back into euro again because they(ECB) decide not to or US fate at that point looks worse than Europe's.

Tue, 06/08/2010 - 15:51 | 402225 akenathon
akenathon's picture

Nop...you should look at the next huge trade: USD/JPY to go to 75.00 when BOJ has no more fire....with this Gold to rocket like never

Tue, 06/08/2010 - 16:00 | 402244 hellboy
hellboy's picture

i think in the short term most eyes are going to be on europe/korea/israel/oil rigs... short term meaning next 6-12months.. or you think another unknown will come into our n-dimension formula pretty soon?

Tue, 06/08/2010 - 15:57 | 402241 Hephasteus
Hephasteus's picture

Don't these central bank interventions usually go kind of like heroine interventions. They work for month then it gets worse.

Tue, 06/08/2010 - 15:58 | 402243 egdeh orez
egdeh orez's picture

gold bitches!!

Tue, 06/08/2010 - 16:00 | 402247 Gunther
Gunther's picture

The Euro gets sold but high-quality Euro-denominated assets are fairly stable.
The stocks in the 'club med' act weaker but panic looks different.
The bond vigilantes share this view.
http://stockcharts.com/charts/performance/perf.html?$CAC,$DAX,$BEDOW,$ESDOW,$SPX
http://markets.ft.com/markets/bonds.asp

The FX markets are huge, the options at the CME are only a small part of it.
http://www.placingtraders.com/news/read/109067
"CME Group, the world’s leading and most diverse derivatives marketplace, experienced record trading volumes and notional values for FX products on Wednesday, April 28, 2010. Trading volume for FX products reached 1,476,662 contracts with a notional value of $193.3 billion"
http://en.wikipedia.org/wiki/Foreign_exchange_market
"According to the Bank for International Settlements,[3]  average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, as of April 2007.
The $3.21 trillion break-down is as follows:

    * $1.005 trillion in spot transactions
    * $362 billion in outright forwards
    * $1.714 trillion in foreign exchange swaps
    * $129 billion estimated gaps in reporting"

The real driver seems to be somewhere else.

Tue, 06/08/2010 - 16:06 | 402257 pak
pak's picture

Thanks for the post. Imho, COT is one of the least appreciated but very valuable metrics.

Tue, 06/08/2010 - 16:24 | 402309 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

S&P finishes up 1.1%

Bilderberg wishing everybody a happy Tuesday.

Tue, 06/08/2010 - 16:44 | 402373 phatdat
phatdat's picture

The Euro stood at USD$1.5 per, because the mkt actually believed the debtors who borrowed too much will be punished.

 

And not this weak kneed bailout affair that followed.

 

If Euro = DMark, sure it will rebound.

But if the Euro = some ex club med currency @sub 1% interest, it will be a long steady decline.

 

So before it was a DMark thats why it stood at USD$1.5, now that it is proven not to be... it falls... All those who says it will rebound, please convince me how the mkt will in the future believe that the Euro will once again be viewed as DMark?

If you can't, then join us and short the Euro (also buy some French Soverign CDS)

Tue, 06/08/2010 - 16:55 | 402403 TexDenim
TexDenim's picture

Well doesn't making the cover of "Newsweak" equal "not gonna happen"?

As I've said before, the political glue that holds the Eurozone together is much stronger than the economic crowbar that is pulling it apart -- as contrary to logic as that might seem. But in Europe, political considerations always trump economic reality, at least until the roof caves in, which could be decades.

 

Tue, 06/08/2010 - 18:24 | 402555 TBT or not TBT
TBT or not TBT's picture

The roof has been caving in slowly for decades.  Socialism and all that.  At some point things will give, all at once.   The europeans hate change and love revolutions, and from the resisting the former you get the latter.

Tue, 06/08/2010 - 18:00 | 402516 BeerGoggles
BeerGoggles's picture

Euro bitches!!!

Tue, 06/08/2010 - 21:45 | 402852 RagnarDanneskjold
RagnarDanneskjold's picture

Wave 1 is finishing, erasing 4 years of gains. Wave 3 or Wave 5 will be much larger. 

Tue, 06/08/2010 - 22:05 | 402876 Pike Bishop
Pike Bishop's picture

Newsweek could have Lord Blankfein doghumping the Euro while draped in French sovereign CDS, and it couldn't ever possibly match the "America's Back!" cover and article by Daniel Gross.

CNBC doesn't include that much financial porn in a month..OK, a week.

Next Fall, when we cancel the elections and just get on to the much deserved Civil War II, Newsweek gets burned to the ground no matter who wins.

 

Tue, 06/08/2010 - 23:27 | 402994 Anarchist
Anarchist's picture

Germany has no incentive to let the Euro die yet. At times when the DM was strong, exports were crippled to other European countries. Since the Euros launch lots of trucks, cars, cranes ..etc have been sold to Greece, Spain ...etc. Things will need to get a lot worse before we see the DM come back.

Tue, 06/08/2010 - 23:39 | 403012 Apostate
Apostate's picture

To me, this actually makes some sense.

When Newsweek believes something... it means be light on your feet.

When the USA starts bailing out the states - and various quasi-governmental enterprises like the MTA, the NY-NJ Port Authority, various pension funds (CALPERS), and so on, the dollar will weaken. It's just a question as to whether or not it will weaken versus the Euro. 

Wed, 06/09/2010 - 01:46 | 403156 lawrence1
lawrence1's picture

And what of fofoa's prediction that the ECB will use their "nuclear option," i.e., gold to back the euro?

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