Increased Euro Short

A quick update for subscribers - we'll have an updated portfolio review later this week, but I increased my short euro exposure.

Tags: currency trading, Euro, USD

Currency | | August 31, 2011 2:40 pm | Comments (0)

Lots of news, but what’s important?

There is a flood of data and headlines that seems almost spiteful to anyone trying to enjoy their usually-slow August. For me, it gives a good excuse to turn away and read even slower as most of the flood is meaningless for my portfolio. That being said, some of it is not.Viewing the remainder of this article requires a Subscription

Milestone of Contrary Indicator?

Gold reached a new milestone today as it surpassed SPY to become the largest ETF by assets. From CBS Marketwatch:

Net assets in the gold fund Friday were $76.7 billion vs.

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Equity down, CRB up

August 2nd was the debt ceiling deadline, and as anticipated, our leaders came through with a deal that raised the debt ceiling, but has only negative long term implications in terms of fiscal policy.Viewing the remainder of this article requires a Subscription

A slow pain

Some pains are sharp and localized. They require a quick decision, but mostly, they're easy to work through because we can be confident that they'll pass. The headache that comes on quickly at work at 3:30 in the afternoon is usually bad, but after the first few times, it stops worrying us.Viewing the remainder of this article requires a Subscription

End of the Yuan peg?

In one of the least mentioned news stories of the day, the CME will start trading yuan futures in August. From Bloomberg:

Trading of the futures, which will be listed on the CME exchange, is due to begin Aug.

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It’s the End of The Euro as We Know It…And I Feel Fine

For a brief moment, the markets believed. For a brief moment, the Greek problem was solved. But then reality set it. Greece’s fiscal austerity and monetary headache is going nowhere and German’s are getting fed up with supporting their neighbors.Viewing the remainder of this article requires a Subscription

China and the Yen

Why would China bid up the yen? The short answer is I’m not sure.Viewing the remainder of this article requires a Subscription

G3 Currencies

G3 Currencies I’ll say it: G3 currencies are not making sense. Forget about irrational, or momentum, or fundamental, or whatever. There appears to be almost no underlying logic in some of the recent moves exhibited by the major currencies.Viewing the remainder of this article requires a Subscription

How high can the USD climb?

I have been writing that the pronouncements of the death of the dollar are premature, at best. Currencies are a relative game, with no way to judge one without talking of another.Viewing the remainder of this article requires a Subscription

More on moving averages

I’ve read a couple of pieces about the markets breaking below their 50 DMA, but why do people only write about it when it confirms their thinking? I’m referring, of course, to the fact that those same people aren’t writing about the fact that USD index is breaking above it’s 50 DMA. It’s probably because they wrote about the end of the USD just a few short days ago.

Thoughts on the euro

The euro is the story of the day as Greece announces it is considering leaving the common currency. Of course it’s considering it! Is this news?! Anyway, the currency continues to confound with its very existence. A couple of pictures…The first is the euro (FXE). Actually holding up better than I ever anticipated. Then, look at it vs. the aussie dollar. Free fall. Lastly, I show the USD (UUP). It’s having an outside week – this time positive. Could it be the turn? Maybe. And last question: Can the equity markets rally without the USD gowing lower? I don’t think so.

Relevant ETFs: UUP, FXE, FXA, EUO

And you’ll have to deal with Pressure

Trichet did not grow up in the US, or he probably would have heard Billy Joel’s classic song “Pressure” (I’ve excerpted some of the lyrics in case Trichet decides to read this without listening to the song – emphasis mine):

You have to learn to pace yourself
You’re just like everybody else
You’ve only had to run so far
So good
But you will come to a place
Where the only thing you feel
Are loaded guns in your face
And you’ll have to deal with
Pressure
You used to call me paranoid
But even you can not avoid
Pressure
You turned the tap dance into your crusade
Now here you are with your faith
And your Peter Pan advice
You have no scars on your face
And you cannot handle pressure
All grown up and no place to go
Psych 1, Psych 2
What do you know?
All your life is Channel 13
Sesame Street
What does it mean?
Pressure

Don’t ask for help
You’re all alone
You’ll have to answer
To your own
Pressure
I’m sure you’ll have some cosmic rationale
But here you are in the ninth
Two men out and three men on
Nowhere to look but inside
Where we all respond to
Pressure

And so it turns out that the Eurozone is just like everybody else: political pressures to devalue the currency outweigh the policy need to maintain low inflation. The funny thing in this situation is that it looks like Bernanke & Co. will turn out looking smart because inflation pressures may turn out to be temporary anyway, as I’ve been warning for months. The exposure to gold and precious metals in not an inflation-based thesis; on the contrary, it is a hedge against deflation and the coming complete loss of faith in the Fed’s ability to control the economy. Energy and agriculture, as well had a nice inflation hedge component, but the underlying thesis was one of increased protectionism, resource nationalism, and increased political turmoil. Those are balanced by a continued shunning of financials and real estate, shying away from retail, especially luxury goods, and a move away from consumer discretionary. This is the coming margin compression we’ve been discussing.

The euro was in a different reality. Even as the fringe members showed signs of internal collapse (remember Greece?), investors refused (and still refuse) to admit the underlying structural fault in the common currency. And then, a funny thing happened. Bernanke temporarily succeeded in making the USD the most hated currency worldwide; he won the devaluation race. In the process, worldwide inflation increased (as assets priced in USD skyrocketed) and the eurozone looked prudent with their hawkish stand. That is now changing.

Europe is not different. In fact, if it IS different on any level its in worse shape than the US. The fringe members were only preludes to the challenges faced by the bigger players. Keeping a hawkish stand on rates, while Spain faces depression-era unemployment is impossible. Increasing rates when one of your largest trading partners (China) is orchestrating a slowdown suddenly doesn’t look so attractive. Increasing rates during a debt deflation cycle, when asset classes worldwide are going to have liquidity and leverage-based pricing sucked out, is political suicide. Etc. Etc. Etc.

So now, the race starts again, except this time, I don’t think Bernanke will be able to “win”.

The euro is now exhibiting an outside week (for the technicians at home). Fundamentally, it is only a question of “when” will the euro break down. Gold in euro has moved off its highs, but I anticipate this to be a good entry point, if a bit early:

As always, this is not a recommendation and readers are encouraged to do their own research. I have positions in euro and gold.

Watch currencies

Some interesting observations:

• The Dollar Index has been down for the past couple of days. Isn’t it interesting that EEM and EWZ are down also? Would they have gotten enough of a boost from the currency exposure? Check out the chart, where you’ll see that overall, down dollar, up EEM…except in the last few days.

• How about that Canadian Dollar? I just cam back from Montreal, where I had to face sneers and jeers about the USD being the new peso.
• Is silver now a currency? I’m gonna go out on a limb and say no. It a (sometimes) industrial metal, often a speculative tool, and never the same as gold. It’s more abundant, it fluctuates more, it has actual uses and can be priced by supply/demand dynamics, etc. – all of which are different than gold.
• USD – this is the key signal across all markets now. I can’t help but question the validity of ever-lower prices against all the other currencies out there. Euro? Really? Are austerity measures really working? For a currency dependent on one country’s export prowess (Germany), can a slowing world (US GDP disappoints to the downside at 1.8%) really help prop up a continental mish-mash? I’m not adding to long dollar positions yet, but I’m not far from it at these levels. Being contrarian involves making the hard trade. Going long the USD will be the hard trade.

Relevant ETF’s: CEF, UUP, SLV, GLD, EEM

Yen

What happened to all those repatriation of yen will end the dollar stories I kept getting last week? Turns out that a natural disaster is no match for demographics in this case. It’s not to say that the yen can’t strengthen, but rather, to point out that news of the death of the dollar may be premature.

…and to take it a step further, if I had to guess which currency is in more trouble (yen or dollar)…well, readers know I’ve staked my claim.

As a sidenote, someone asked me whether I’m “hoping” the yen will go down. I put hoping in quotes because it’s a very specific term that I want to highlight. I do not “hope” the yen will go down and even though I will benefit from it, there is no judgment or or feeling of elation if it comes to pass. Instead, the appropriate word choice is “anticipate” or “expect”, in which case I can answer, “Yes, I anticipate that the yen will decline relative to the dollar and because of that I took a position to implement my expectation, not my hope.” It’s a subtle difference, but an important one, I think.

Relevant ETFs: FXY, YCS, DXJ, UUP