Friday, April 20, 2007

Slow motion crisis redux

The ancillary implication of the slow motion crisis is that European firms are probably in better shape with the euro here than previously. It seems dubious that this is because hedge rates have improved from 2004- that would seem virtually impossible- but rather that productivity has improved and that domestic demand is firmer. Moreover, Eastern Europe is growing like gangbusters, and the euro is not strong against PLN, HUF, CZK, etc.

Today's comment from the German exporters' association that they can live with EUR/USD at 1.40 was telling. As an aside, a 10% rally from the low of the year, which would make this move comparable to prior moves, would put EUR/USD at 1.4150....

6 comments:

Anonymous said...

please explain what a

" gbp/usd 1.70 1 touch , 18 jan "

position is .... is it a knockout option ?

thx in advance

Macro Man said...

A one touch is an option that pays out a fixed amount (in my case, £5 million) if and only if a certain level is reached before expiry- in my case 1.70 by January 18 2008. The purchaser pays a fixed percentage of the payout.

I like to use them as lottery ticket bets for low-probability outcomes, as the risk/reward is tremendous. The position that you reference is a small bet on a structurally bearish view on sterling which is clearly not in play at the moment.

Robert said...

Would you please explain the Voldemort reference?

Macro Man said...

It refers to FX reserve managers generally and China's PBOC specifically, and calls upon the fact that

a) they are everywhere in certain markets (foreign exchange, for example), and

b) the banking/brokerage community can only refer to them obliquely when reporting what they are up to in real time.

I first used the Voldemort reference here,
and it seems to have caught on...

Anonymous said...

Ref Central and Eastern Europe ...

Growth comes at a prices ... CA deficit ... which makes the economies vulnerable to Asian like crisis ...

A

Macro Man said...

Yes, the CEE-4 all have current account deficits, but they differ from Asia 10 years ago in three important ways:

1) The magnitude of c/a deficit, which is much smaller in Eastern Euope. Even Hungary, twin deficit poster child, has seen a solid improvement in its external balance

2) A large percentage of CEE4's c/a deficits are funded by long term FDI, whereas Asia was heavily reliant on hot money capital flows

3) CEE4 are members of the EU, and presumably there is an unwritten understanding to help these guys out in times of crisis.

None of this guarantees the avoidance of a crisis, but it makes one less likely, despite the prevalence of things like Swiss franc mortgages throughout Eastern Europe.

I say all this as someone who has played Eastern Europe on and off from the short side over the last year or two...