On FX

Bruce Krasting: On FX

I’ve been running a short EURUSD for the past six weeks. I got in at 1.2650 (Link) on June 30, and doubled up on July 8 at 1.2260 (Link). I was delighted to see the Euro get cheap in Friday’s trading, but the market action forced a decision. I wrote some things down on a pad, thought about it a bit, and said, “Screw it”,  and cut the whole position. Here's some of my thinking:

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I hate trading FX at the end of July. The markets shut down with the approaching European August vacations. The last week of the month is about cleaning up positions, not putting new ones on. August is never a time to be involved, unless you have to.

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There was something odd about the EURUSD trading Monday through Thursday. Tyler Durden, at Zero Hedge, made note of this (Link).

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The red arrows that Tyler drew bother me.

This stinks of “official guidance.” It’s tough to make a buck at the FX casino; it’s tougher still when the tables are rigged.

 
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In May and June the Swiss National Bank (SNB) bought CHF 110Bn worth of Euro’s. That’s a staggering amount. I’m convinced that the intervention was heavy in July as well. Reserves are headed up another CHF 50Bn. I think these numbers still understate what is happening, as the SNB has been writing calls on the Franc.

In the course of just three months, ¼ Trillion Euros have crossed into the Alps. This is unsustainable. At some point it will have to result in a messy blow up. But not necessarily in the month of August.

I don’t think the SNB is going to fold its cards just because they are under attack. If the SNB were to quit intervening, the EURCHF would be nearing par in a matter of days. The cost to the SNB would be CHF40Bn (15% of GDP).

Before taking a loss of this magnitude, the SNB, (with the blessings of the government), would implement a variety of exchange controls. I think this is a something that could come sooner than the market believes.

It is my understanding that there is significant macro hedge fund positioning in the EURCHF. I don’t believe that the SNB is going to simply write a monster check to some fat cats up in Greenwich. There will be (at least) one more chapter in this story.

Should there be something that makes people blink on the CHF, it could end up causing short positions in the EURUSD to get jumpy. I'd rather not be part of a jumpy crowd.

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I’m worried about what Bernanke may do on August 1st. We could see something that brings the US negative short-term interest rates. (My thoughts on this: Link). It’s very difficult for me to be a dollar bull. I’m much more comfortable playing the dollar from the short side.

 
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The Euro weakness on Friday was related to a big selloff in Spanish bonds. The Spanish ten-year ended up at 7.27%. This means that a Spanish bailout is not far off and Italy is next in the crosshairs.

Really? I don’t think so. It's not going to be that easy.

The Euro technocrats are not going to fold in August. They may be going down, but I fear more battles are in the offing first.  SMP purchases of sovereign debt is likely next week.

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Realized gains have been elusive for me this year.

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Now that I don’t have a position to worry about, I’m worried about not having a position. I will be looking for an opportunity to re-load a short Euro exposure. Hopefully it will be at higher levels than Friday. Either way, I will act before September rolls in. The Euro is still toast.

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