Hmm... Do I smell a Euro?

Tuesday, August 10, 2010

We started by beating up on USD 18 months ago, as we thought QE and the US printing press would devalue the dollar and raced into Euro as they were obviously less willing to print. Then this year has seen the Euromare surface and we started selling Euros and piling into USD because at least the US had taken action and Europe were behind the woe curve and about to go through the same. Then in mid-flight the Eurostriches suddenly stuck their heads in the sand and everyone said "Huh, where did they go?". So we charged off to sell USD again because the US starter motor hasn’t worked and they either need to bring out a new battery (that’s what today's FOMC is all about), or they are in a deflationary mess, apparently. Meanwhile, Europe is still hiding in the cellar waiting for the coast to be clear. Apart from Spain's Zapatero, that is, who today appears to be shouting "Ya boo sucks" at the market, announcing that he is considering relaunching certain public works contracts. We bet even Mangler is now telling him to S.T.F.U.

Have the markets turned and twitched their nostrils? If Zap's intentions are to stimulate the economy with no follow-up comments about offsetting the costs against savings elsewhere, then it does little to reassure a market that is complacently believing that all is now well with respect to peripheral Europe's budget proposals and executions thereof. Perhaps the Spanish could fund the new spending with trimming back the pay of some of their air traffic controllers by the odd €500,000? Another trace of scent is drifting off the peripheral European bond market which today saw a general sell off, led by Ireland as the EU agree to new aid for AIB. "The cost of rescuing the bank pushed the deficit up to 14 percent of GDP last year, the biggest in Europe and just a smidge over the EU ceiling of 3 percent. Analysts say the latest injection could push the budget shortfall above 20 percent this year".

Add to this Eur/usd breaking its up trend, the soothsayer USD cross calls of 3 days ago all looking as though they have indeed called turns (especially in cable), and a host of other tech signals. All suggest we are ripe for a turn.

Below is EURUSD (green line) Ireland 5y sov CDS (inverted, white line), Portugal 5y sov CDS (inverted, yellow line) and Spain 5y sov CDS (inverted, red line).


We haven't included Greece in the chart as we consider that one already "done", though one friend of ours has just received a price list for pre-ordered shopping for his upcoming Greek holiday. Unless they have already decided to price it in Greek drachma, rather than Euro, he can tell you that there is an awful long way to go before austerity kicks in. 3.90 for a small pat of local butter? That must be drachmas...

We have had the end of August in our minds as the boot-off to the real post-summer market moves, but perhaps after the FOMC we will be looking for new meat to chew and we really don’t mind if it involves chasing old prey.

Posted by Polemic at 2:15 PM  

10 comments:

Bucky now taking the predictable post FOMC beating after the Mini-QEase.

After the DXY makes a double bottom or a new low, it does seem as though "EUR on to something" ....

Leftback said...
7:27 PM  

2s10s now 221 bps... how's that STEEPENER working for ya, MORGAN STANLEY?

Caron was actually pitching that today on TV. The Genius of the 5.5% 10y himself. 2.78% 10y right here, which means Caron was "this close..."

How do these tools stay employed?

Leftback said...
7:53 PM  

Those air traffic controllers are worth every penny ;)

Nic said...
11:33 PM  

You have a "GO!", TMM.

FX said...
4:51 AM  

TMM, let's save some pips for Ascot:-)

ps..The Ascot team getting bigger.

FX said...
12:10 PM  

Nicely timed call on the EURUSD, TMM.

2.71% on the 10y here and a 220 bps on 2s10s.
LB would like to make a SHOUT OUT here to some guys who espoused the CONVENTIONAL RECOVERY meme last year. Good guys, obviously, but totally unable to think their way out of a PAPER BAG.

So... Hi, "Gary". How ya doin', bud?

Also today's trade means that the highly-paid Head of Fixed Income JIM CARON at MS is now even "more experter" on "bond yield thingies" than before. WELL PLAYED, mate!

and let's not forget JULIAN ROBERTSON, who was espousing shorting the US bond market with as much leverage as you could lay your hands on. Wotcher, JULIAN..... (could have chosen Taleb or any number of people here).

LB's Question of the Day relates to the Yen:

BoJ INTERVENTION or
FULL SCALE CARRY UNWIND?

We are going with intervention. You know the phone must be ringing off the hook in Tokyo...

Leftback said...
5:18 PM  

Dam timely call.....

scharfy said...
7:20 PM  

FX LB and sharfy, A winner is always welcome. Wish they all could be like that. Fat chance ..

Really sorry we didn't get round to putting anything out today, which was a bit of a frustration, as the yen story does appear to be the next stress point, as everything piles in there during round 2 on the Euro.

Maybe some thoughts on it for tomorrow.

LB .. Has Buffett approached you yet to hand half of your wealth to charity yet? You must be making out like a bandit. So either that or we are all looking forward to you sponsoring TMM's christmas Mcturkey twissler lunch.

I was half wondering if we might see a "flash crash" this afternoon as everything else started a "huh , that wasn't meant to happen" move on nothing in particular.

Positions positions positions....

Nic, I am sure they are... Is that one of yours in your profile pic ?


I better dash off to the other comments from Monday and congratulate some classics.

Polemic said...
9:07 PM  

Nice work on the Euro short. Usually we are all very early here. Like today, LB dipped a toe too early this morning and suffered the loss of a small digit....

The move in Treasury yields has come so far, and with 5y TIPS now yielding zero, LB wonders if a move into riskier credits isn't coming along soon. That, after all, was the Fed's intention, presumably. So now that all the Treasury bears have covered, who is left to buy? We have been steadily unloading the long bonds and raising cash. It has, as they say, been a bloody good run since last August.

Back to the BoJ watch...

Leftback said...
9:49 PM  

I confess in my previous life I was an Air Traffic controller but sadly Heathrow not in Spain so no overtime :( (and I wing walked for a hobby).

Nic said...
4:19 AM  

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