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.