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On FX
On October 25 I wrote about what, at the time, looked like an overvalued EURUSD (it was 1.3950). Zero Hedge had an article attributing the strength to ongoing capital repatriation by EU (primarily French) banks. My words:
As long as there is Euro repatriation, the EURUSD will remain overvalued. It’s about day-to-day demand, not the backdrop of the news.
I can’t predict how long this will take to wash out. My guess is under a month. I think the Euro is a big short. I can see EURUSD = 1.3000
I covered that up Friday morning. (Note: This was a nice win, but, alas, there is “ugliness” on other parts of my sheet). I went for a long walk feeling pretty good about being disciplined.
About a mile into the woods I started having second thoughts. I turned around, came home, made a call and spent a good chunk of the realized FX gains buying expensive puts on the Euro. Fuck discipline.
Let me try to explain my schizophrenia. On one hand I don’t think the EU is going down without a fight. I think there is a decent chance that some additional steps are announced in the next few weeks that will give the appearance of an all out effort to save the Euro Zone.
Something significant could come from the IMF. We could get news from the US Treasury in the form of a draw down of the Exchange Stabilization Fund. There could also be additional measures by the US Federal Reserve. The ECB could announce un-sterilized bond purchases (Euro QE#1). There are a number of other possibilities.
The market is short Euros (in big amounts) against everything from Yen, USD, Sterling, and Kroners. This is a very crowded trade at the moment. I hate crowds. That was the reason for the AM bailout of a long held position.
But there’s another possibility. We could see the whole Euro experiment unwind by March. The Fed can’t really do a thing. Their hands are tied. Bernanke has already said he would not bailout the EU. If he reverses himself he will lose his credibility, and his job (He knows that). Tim Geithner can’t do much with what is available to him. The ESF has no size behind it ($105 billion). The IMF will probably do something, but the most it could bring is a few hundred billion Euros. If the ECB goes into the QE business the rating agencies and the market will retaliate. My bottom line is that no one has a bazooka.
Consider the news of the past week in Europe. Hungary is falling apart in an ugly way. In Berlin and Bern there are significant political scandals (Wulff and Hildebrand). Important elections are coming in France. The whole area is rapidly moving into recession. The rating agencies will be downgrading core countries over the next month. The refinancing requirements of the Sovereigns and their banks can’t be accomplished in the current environment. We may have a failed auction that tips the scale to chaos.
What is one option that is not now being considered and would have a beneficial affect on the EU? Simple. Devalue the currency by 20%.
Far fetched? Impossible? Maybe. But that is exactly what happened on 9/22/85 when then Treasury Secretary James Baker engineered a significant devaluation of the dollar with the Plaza Accord. To achieve the desired devaluation the global central banks sold dollars. I know, I was strapped to a seat for a week.
There are no central banks that want to do this. It would hurt the US, Japan, UK, Brazil, Korea and China. But they don’t want an implosion of the EU either. A significant devaluation would be a big boost to short-term economic prospects for the EU. It would do little for the solvency/funding problems. But it would stimulate growth and create some jobs. Without that, the EU is dead anyway, so devaluation is not out of the cards.
A compelling argument for a coordinated devaluation is the Swiss Franc. The Swiss National Bank engineered a 20% devaluation last year. With a “little help from its friends” the ECB and the French/German central banks could pull the same maneuver. Desperate times require desperate measures.
What are the odds of a coordinated devaluation of the Euro? Not high, is the answer. But it’s not zero either. It doesn’t mean much if a low rent blogger brings up stuff like this. It would, however, be significant if one of the EU papers ran an editorial along these lines. Better yet, one of the ‘deciders’ could say something about how “desirable” a cheaper Euro would be. The odds of something like that are pretty high in my book. It wouldn’t take much talk to get the markets riled up.
So I bought those puts. Like most puts, they’ll likely expire out of the money. But there is a 1 in 5 chance they will come into the money big time. If they do, I’ll have an another FX win, but the rest of the sheet will go deep into the red…..
I’m not satisfied with the responses by Philipp Hildebrand. But the Swiss newspapers are all giving him a break. The Swiss love their head of the SNB. He was a swimming champ. He’s good looking, and so is his wife. It seems, for the moment, that his conduct will be swept under the rug.
But, behind the scenes, Hildebrand will remain under attack. There is a dark political angle to this story; powerful people in Switzerland want Hildebrand out. They blame Phillipp for the mishandling of the currency intervention that led to a $21b loss for the SNB. I think these same powerful people are afraid that the current SNB policies could deliver a very damaging blow to the country.
Swiss foreign reserves rose to nearly CHF 260b (50% of GDP) at the end of December. That’s up significantly from November. In addition to these published reserves, the SNB has stated that it has used options to maintain the EURCHF above 1.200. So we really don’t know how big an exposure the SNB has.
If one more shoe drops on Mr. Hildebrand (or his wife), he will be out. That would immediately give rise to the question of whether the peg will be maintained. The real reason that Hildebrand is in such trouble today is that he was responsible for the intervention policy that led to the dangerous reserve accumulation. Given that, it’s likely that his successor would not be so willing to follow the same path. A new SNB chief would, at a minimum, have to reconsider the intervention/peg policy.
If Hildebrand is forced out, I think the SNB would have to step up and absorb a few hundred billion addition Euros. I don’t think they can do that. Something like that could bust the SNB.
Please don’t read this as a suggestion to speculate in the CHF. The scenario I describe is not the likely outcome. I am suggesting that one pay closer attention to the CHF crosses. If the EURCHF backtracks close to the 1.2 level there is going to be fallout across all markets.
The EURCHF closed at 1.2147 on Friday. That’s a two-month low. I (and a bunch of others) made note of this close. I’m sure the folks at the SNB did too.
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Why? Backdoor monetization is already well known. Open monetization could just as well result in EUR appreciation in the short term as the market gets what it has been screaming to be a solution (albeit a Keynesian solution, which of course on a long enough timeline is no solution at all). I'm inclined to expect some grand move and most likely coordinated 'globally' with the IMF playing a staring role. This is a very critical year for TPTB. The hedge is on an orchestrated collapse but that would require (in their view) essentially the same steroids for sale template for 'salvation'; a massive global intervention highlighting the IMF and on Keynesian terms.
In other words, we are fucked no matter how you try to frame it.
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To Argos, below, and those argonauts:
not amazing, its reality, and the amazing thing is how we got where we are...its been written in the construct since thirty years. So those who have kept their eye on the ball can see this development more clearly than those who haven't.
But knowing the past does not write in concrete how the future will be, just gives us comparative indices; a vague sensation of having seen the film in some other bygone age. But the actors are not the same. So the academy award is up for grabs for He that will stick his neck out further than the other guy; thats Holywood for you. The show must go on.
"Hungary falling apart in an ugly way"????
Bloody Hell !!
I am sitting in Hungary and doing international business from here since 22 years - and I know what I see.
Here are the facts (available to everyone if you would read more than just the headlines):
Foreign Currency Reserves as of Dec 31, 2011: 49 billion USD
Trade Balance: highly positive since years
Budget Deficit: under 3%
Debt/GDP around 80% (depending on the lately very volatile HUF rate)
These numbers put Hungary in the better third of all European countries. If Hungary is junk - then 2/3 of Europe, USA and Japan is junk as well.
The government has a STABLE 2/3 majority in parliament and the support in the population is NOT decreasing.
The "liberal" (and internationally well-connected) opposition is hysteric about that and launched a coordinated media campaign. We can read similar headlines all over. The Cartell is bashing Hungary now for not being obedient.
Therefore Hungary has an image problem - it is prey of a coordinated attack through the media and the financial markets - including the rating agencies.
It is the typical case of "I have the gun - you dig."
Just stop the attacks and Hungary will be very well off - even without the IMF.
the GS twist and the NWO plan; its a bitch for the small guy who wants to be different. But all this razmattaz that Hungary is now leaning fascist, any truth?
I got out early on Friday, also. I get out early on every Friday because the 'policy makers' have a tendency to change the game over the weekends.
So, Thursday wasa good for $410,000 and Friday $200,000 before lunch.
Up or down on Monday, who cares, I am in either way.
You lost me at "The Fed can't do a thing"
Did you really say...>>Bernanke has already said he would not bailout the EU. If he reverses himself he will lose his credibility, and his job (He knows that).<<?
Bernanke has said one thing and done another, and done one thing and said another, often. In mid-December, he told some angry congressmen that his November 30 move, and his mid-December currency swaps, were not the bailouts they certainly had to be. He not only didn't get fired, he probably was following orders.
"He would lose his credibility, and his job..." Huh? What credibility would that be?
The CHF tends to follow the dollar.
Trouble in Europe, which will continue, boosts the dollar and the CHF.
Another ECB bailout, another IMF injection, and more FED currency swaps may keep the Euro afloat in comparison to the Dollar and CHF; however, Greece will default, and the Italian banks and bonds will come under increased attack.
The Euro is headed for parity with the dollar, which will pump the dollar and the CHF, at least until attention turns to U.S. debt problems.
The timing is the rub here; and the central banks will do everything possible to confound the timing of the markets and traders.
Shark and killer whale infested waters; swim with caution.
NOPE! If you trade that you will get pounded into the dirt. Just keep a few smalls arround 1.2150-80. I'll go Hildebrand when the time comes. Pay attention to Euro /Yen & Euro/Aud.
http://www.youtube.com/watch?v=8gciFoEbOA8
"a low rent blogger"
Oh, very nice, Bruce. What does that make us? We're the low-rent readers of a low-rent blogger.
Between Bruce and Ben and Tim, I get the feeling I don't matter at all.
Not the case at all.
My stuff about Hildebrand and the SNB are being read in Switzerland. Today I was interviewed for French radio out of Lausane.
So the line about me not really counting was a dig at the Swiss Press to ask the questions I want answers to.
Sorry if this confused you.
bk
It makes you an "ASS" looking for closure!
What did the right butt-cheek say to the left butt-cheek?
"If you and me stick together, we can stop this crap."
This thread is old news! I know what SNB is doing. Go ahead and play that 1.125 level. I mententioned this trade befor new years. Look @ the pattern of the last intervention. eur/chf. I have a couple of small trades left to keep my interest.
I like the yen trade.
First off I'm pissed off at The Commentariat for not calling Bruce The Exceptional Blogger of the New Year. BREAKING NEWS Bruce is his new Zero Hedge name! (I only wish to add that according to my sources it is now confirmed by Mrs. Hilldebrand that Mr Hilldebrand was the finest breast stroker Switzerland will ever know.)
That's what she says but was she only trying to get actionable pillow talk?
This is your obvious mistake in the whole process. Rethink it from the other point of view, Bernanke bails out the EU, indirectly at the very least, and he does not lose credibility with the guy who signs his paycheck. We've been down this road way too often, and I am surprised you made this assertion.
I'm all ears BRUCE! Let's discuss F/X! I'll bet that { EFX} , is your trap door?
Nice BK as usual- tx.
(Researched & retracted - Hildebrand forward opened after usd lows )
Must not rumour monger, must not rumour monger...
ben will break the law and help the euro; i don't know if he can but i am certain he will try
A drop of 20% of the Euro would decimate US bullshit currency trade based earnings. Somehow amazingly oil would probably still trade higher, I would then love to get every MSM writer in a room to try and explain that move after writing, "Oil is bought in dollars and a lower dollar makes oil less expensive in foreign currency increasin demand for dollar denominated oil causing the price to rise". I'm sick of that bullshit excuse. Any company our country using oil for productive purposes does not want the commodity to rise in price. The world is going down and there is nothing any central planner can do to stop it. Anything they try will just increase the speed of Armageddon. The only chance is every central bank cosing up shop and forcing every insolvent entity to fail.
I agree with this.
Thanks for your insight Bruce. It is so much better to hear from an experienced player rather than the sports announcer.
I have no idea if that is the true bottom, my charts says it isn't. but as a trade fridays wasn't a bad time to buy if you look at the weekly charts. uou will spend on average more time above the current line than below it. But I almost always take profits on this type of rapid drop, (1/2) the total. then set a stop loss at the top of last week. I din't not expect this drop below the lowest low based on my chart method. but it was time to sell for a trade regardless.
the best way to track, looking at different charts is the weekly trend line of vgk. that hit top of down slope on the drop, but the udn security gave sell signal as well, but for a couple nornmal day drops, and not the one we had. I did not expect it to drop below the low of the week prior.
Bruce, Bruce, somehow the very fact that you are that much into FX and it's trading is a classic: you don't "get" Central Banks
- Devaluation vs the Dollar is exactly what China is doing since years and the SNB vs the EUR. It's what the US used to call a manipulation to exact an unfair trade advantage. And Bruce, to get there the EZ leaders just need to do what they can do best: look incompetent. Why should the ECB do more than just watch how the English speaking MSM is making all things sounding "eur" bad? You are arguing both sides here, do you realize? The current currency war phase is on going down, which the Yuan is winning, EUR second, USD third.
- "Swiss foreign reserves rose to nearly CHF 260b (50% of GDP)" you look at this number and think also at the 22bn losses. Do you actually understand that all this - as soon as the trend reverses - is going to be good for the SNB, the same way as having ammunition - when ammunition is needed - is much better than not having ammunition?
Is Soros' raid on the British Pound that long ago that you have never studied it? Why could he make that kind of money out of the BoE?
The trend of EURSHF is going to reverse in such a way, that the SNB will make serious money on its EUR foreign curreny reserves? I'd like some of that you are smoking.
no, central banks are not in the business of making money - my two cents derive from the observation that currency wars have usually two main phases, first the "race to the bottom", and than "holding the line in the sand". in the second phase (which you can tell is there when all financial news is about reserves) it's the moment where the cbs try to stem the tide they have created...
we'll see...
As per usual...Soros had inside info on the BP devaluation. Bought 1 billion BP put psoition.
'The current currency war phase is on going down, which the Yuan is winning, EUR second, USD third.'
#winning.
I just wanted to change the tone and the angle of the last sentence, I mean Bruce is quite an "oldtimer", he really should know those things. But again, "financials guys" are so busy "talking their books" and having to handle the short term that some schizofrenia "comes with the job".
So, who is winning in your opinion? My impression is that Ben is really, really jealous of the Chinese, they have the inflation he wishes he could achieve...
-----
I read the article again: it simply does not sense to me the way he writes it. Devalue 20%, fine, how?
With dealing with the FED (more swaps, etc) - meaning the FED allows it?
Or against the FED's wishes? If against the FED, then how, with a peg? Urghhh..
For the FX traders it sounds so simple, but the CB's have to take in the whole picture...
Open monetization from the ECB would do it with a quickness.
Why? Backdoor monetization is already well known. Open monetization could just as well result in EUR appreciation in the short term as the market gets what it has been screaming to be a solution (albeit a Keynesian solution, which of course on a long enough timeline is no solution at all). I'm inclined to expect some grand move and most likely coordinated 'globally' with the IMF playing a staring role. This is a very critical year for TPTB. The hedge is on an orchestrated collapse but that would require (in their view) essentially the same template for 'salvation'; a massive global intervention highlighting the IMF and on Keynesian terms.
In other words, we are fucked no matter how you try to frame it.
There is no winning. We're all losing. Each.and.every.one... slowly...
Seriously though, finance is now being overwhelmed by geo-politics as many recent topics are now suggesting. And that is another realm altogether especially for the tarders and their limited world-view of 'market' fundamentalism. I think we agree that the € hysteria overblown for our Yankee friends to feel good about the status of the reserve currency which continues to be public enemy #1. See example:
http://www.bloomberg.com/news/2012-01-07/iran-russia-replace-dollar-with...
China, is indeed the closest to what you could call 'winning' only because they have a population that is quite expendable and have adopted neo-mercantalist policies that anticipate a trade war.
"the rest of the sheet will go deep into the red"
why bother buying out of the money puts that will expire worthless and holding positions that will tank? With the euro short trade so crowded, and the macro picture so negative, you're better off unwinding the whole "sheet."
Interesting your mention of the Plaza Accord from September 1985, and the somewhat coerced devaluation of the dollar, which led Bruce Krasting to have a very 'lively' week of trading back then.
The Plaza Accord is said by some to be an extortion by the US against both Japan and the Europeans, which led to the Japanese bubble and then the crash starting circa 1990 ... with whose consequences Japan is still suffering more than two decades letter, though it perhaps managed the consequences as well as possible. Japan's share market stock values never again saw those highs, still marking about one-fourth of the pricing at the market top.
Older folks can remember the talk back then that Japan was going to 'take over the world' economically ... According to some, it was the Plaza Accord extortion by the US against Japan, that basically destroyed that possibility.
The frightening message is that economic inferiority is ultimately trumped by military policy and power politics. The United States now is a country somewhat like North Korea, 'military first' while its infra-structure is left to rot and its own people are getting economically deprived.
The frightening implication is that the US will, in months ahead, use that military power for international economic extortion, just as it perhaps did back then, in 1985 ... though now it would likely be on a much more terrifying, bombs-and-real-war scale.
As the US long bond finally hits its top and then reverses ... the US might be pulling that war and extortion trigger. And the world will suffer much more than Japan did after the Plaza Accord.
You should not confuse a trigger event with the main reason. The Japan Yen became ridiculously overvalued at the time. But the main problem was Japan completely underestimated the stampede out of it's currency.
The U.S. threatened Japan with tariffs or other trade restrictions that would put a screeching halt to its huge trade surplus with the U.S. circa 1985. That was the threat the U.S. was brandishing at the time.
And, Japan was *still* a country with a huge trade surplus after the Plaza Accord. The problem was that the increase in the value of the yen led to multiple market bubbles that the japanese gov't and businesses didn't handle very well. In early 1989, the land in Tokyo, just the city of Tokyo was valued at more than all the land in the state of California.
And in, I think, late 1988, saps like James Fallows were still writing magazine articles about how Japan was going to dominate the future.
But, Japan didn't have to go bust. Its export industries were still performing very well. The problem was that it's gov't and economic infrastructure screwed up. Were the conditions of that screwing up forced on them? Yes. Had they done things to curb the massive real estate bubble that got going there or then let their big banks go insolvent after it had popped or not resorted to absurd degrees of keynesian stimulus and born short term pain then they might be in a much better situation today.
But, then, the U.S. is making exactly the same mistakes even with the recent and obvious example of Japan's errors.
http://www.nytimes.com/2012/01/08/opinion/sunday/the-true-story-of-japan...
1989??? "The Myth of Japan's, Failure"___by eamonn fingleton 1/6/12 ny times
This is Zerohedge, by definition anything in the NYT must be wrong. It has to be rantings of a socialist Krugman wannabe....
How dare you post a link to something that is so obviously wrong to anyone having a Libertarian leaning??
But seriously Japan is least understood major economy on the planet. Having actually visited the place, I can vouch that it is very different from what most Anglo-Saxon capitalists think. The Tsunami and subsequent Fukashima disaster is probably going to have a larger impact than a popped property and stock market bubble....
Oh yeah, did I mention that the *interest* on US debt held by the Japanese is sufficient to pay for most of their oil imports?
http://mazamascience.com/OilExport/output_en/Exports_BP_2011_oil_bbl_JP_MZM_NONE_auto_M.png
"they started it mom."
With so many short the EUR, it would create more pain if the EUR bounced up hard first, just to shake the shorts ...
Life in policy driven markets and Bernankology.
It seems you may be correct about that. I would hate to tell Bruce but the price of EURUSD has pierced a long-term Fibonacci line @~ the 1.28375-level and some claw-back is in order at this level. Here is where a long-term support line has been established on the weeklies, dating back to at least late October of 2008.
Sucking in the shorts here would be the way the big boys would play this one because, as we all know, it seems the games that can be played with serious money is never-ending.
So, look for more "wonderful" news out of Brussels and the major European players in the coming weeks. Meanwhile, the EURUSD shorts get crushed and the pair retraces the last move from late August completely. If the EURUSD retraced only half of the last move, the pair would finish @~ the 1.36-level. It could take two months to complete, so I hope those puts last that long!
The weekly charts show a seriously oversold condition and the rebound could come quickly. Out on a limb, the EURUSD pair finishes the end of this week @ 1.2375.
Or not!
Orly
I'll buy 'or not' !
And the limb.
I would be drop-jawed surprised if they don't clear their baffles before they dive. The thing is how can you tell the difference between shaking the shorts and a 'real' bounce? It take more guts than I have to play in the big boys game without insider info.
Gimme a fucking break--my supplier (Tulving) will sell you as many Monster Boxed Ounces as you want for between $1.99-2.79 over spot. eBay? Are you joking??