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This Party Will Not End Well for the Euro
I vote for the later. The euro is essentially winning the best deck chair on the Titanic contest, the fastest horse at the glue factory, and the prettiest girl at the ugly ball. It’s really all about interest rate differentials. At the end of last year, the US economy was growing gangbusters, while Europe was in intensive care. That sent medium and long term American interest rates skyward, while those in Europe languished.
Now the tables have turned. High oil prices are starting to act as a drag on the US, causing economists to rapidly pare back forecasts. Treasury bonds have come back from the dead, bringing the yield on the ten year from 4.70% down to 4.4%. In the meantime, European Central Bank officials have been jawboning the Euro up, threatening interest rate hikes to deal with imagined inflation, no matter that such a policy would be insane to pursue. Hence, we are seeing Euro strength and dollar weakness.
There is another wrinkle to the Euro story here. You would think that high oil prices would be Euro negative, as the continent is a massive importer from that troubled part of the world. But what do Arabs do with the dollars they get for this oil? They buy Euros in order to keep their reserves in a diversified spread. That is why the lurch in crude to $112 in Europe was accompanied by the Euro move to $1.38. This is why the traditional flight to safety bid for the dollar failed to show this time, as it has in all previous oil crises. Some of this spill over buying also explains why the Japanese yen has recently been strong, holding on to the ¥81 handle, despite its dismal fundamentals.
How does this party end? US stocks rally once again, US bonds tank, and oil takes a rest, falling well back into the nineties. That could then take the Euro back down to the bottom of its ten dent trading range. A put on the Euro has become a de facto call on US stocks. That’s when we test the lower end of the European currency’s recent trading range.
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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I think you mean the US ten year went from 3.70% to 3.40%, instead of with the 4-handle you've got there.
"the US economy was growing gangbusters"? Yet no job growth???
This guy is hilarious.
"l love it when a plan comes together." Couldn't agree more. What is it they say? "You could drive a truck through it?"
eur back to trading tick for tick with the s&p!!!
eur back to trading tick for tick with the s&p!!!
ask madhedgefund and then go contrarian...
I disagree about the dollar versus the euro. Barring major political upheavel and the exit of one or several major EMU member-states, the euro is not going anywhere, no matter how horrifically bad the fundementals of the sovereigns and banks. Why? As long as the dollar is reserve currency, and maybe for a while afterwards, the Fed will backstop Europe. Guaran-fricken-teed. Do bears shit in the woods? Therefore, the dollar will fail first, and only then, without the bakcstop, might the euro fail.
yield spread on 12/15s fra is 125 beeps which is unsustainable. expect some yield compression and euro underperformance
O.K. then, what should I do with that yen position at 83.20?
My fxe otm puts would be happy if the party ended sooner rather than later. It is ominous to me that this latest flight to safety didn't go to the usd but to where, the euro?? Really? But then again where else. All the truly safe currecencies are too small to absorb any strong inflow. What does it mean when there aren't any safe hevens. Even the metals are too small to absorb the inflows, that's why the shelves are bare.
The Euro is taking a spanking. Not that the dollar doesn't deserve it. But the reserve currency will die after the Euro. I see it as a bet on who goes first, and the Euro is even more ridiculous than the dollar.
"the reserve currency will die after the Euro."
And what if euro becomes the reserve currency?
No Way! The World Mark is the new currency, and your new God.
It will end better for the Euro than the Dollar. The Dollar's failing global imperialism leaves a huge airpocket for the USD to sink into.
I am a happy European, I pay only 1050 for an oz of gold while you Americans have to pay 1500 dollars :)
How much is a gallon of gas in happy Europe?
I'd rather live in Africa than Europe. F'in Antarctica > Europe
And thanks to the VAT and Gresham's Law, US gold is flowing into your black market.
Gold is VAT free EU wide, silver is from 7 to 25% VAT
I did not know that. Looks like the VAT is only sucking our silver into your black markets then.
This article lacked references to first class flights and relationships to someone well known - what happened?
"imagined inflation" WTF are you smoking?
very "passionate" portrayal as usual.