Daily Archives: June 13, 2014

Reading this, and long time short the EURUSD?

Congratulations. You are a survivor. Could be out of mere luck, or it’s just that you are very resilient. If you are the lucky type, you were either, rich, and able to withstand the loss, or you were fired, but they payed up to your golden parachute. If you can be included in the resilient cathegory, you are probably hard minded, and you dimensioned the trade reasonably, or used some stops on the way here.

Any case, regardless of the happy fact you left no widow or orphans, you’re still beaten up. EURUSD in the 1.36 area, with a recent top above 1.40, is something few bargained for just two years ago. Remember the lows at this time of the year in 2012? What a bounce for the value of the euro!

Backtrading is easy. In retrospect the euro did what should have been expected in this environment. It`s just that some of us didn’t see it coming. Valuations have never been a timing tool, but in the common knowledge game, where central banks intervene “all the time” and always win, valuations, and fundamentals, have become ultra long term factors. In the meantime, its “flow of funds” and “behavioural economics” that leads the way. If allowed to play by the nearest POMO desk on duty.

First of all, the euro tracked the “follow the money rule” outlined by (the antiaustrian/Mises skeptical) Milton Friedman. USD were being printed daily (well, more precisely on POMO days), and EUR were destroyed every month (LTRO repayments). That’s simple and straightforward supply and demand. And simple things always work first, and best. Knowing the LTRO would be repayed was not evident, but Bernanke’s printing couldn’t go unnoticed.

Second, trade balances still work. They are not as important as they were, not after we have all that global liquidity sloshing around. But, all things equal, 2% of the euro zone GDP has to be repatriated into euros yearly. That helps. Not the fundamentals –who cares about them any more-, but the flows matter.

Third, and foremost, the euro followed the route to be expected under the “common knowledge game”. The minute Dragui went all in to save the euro, hot money followed. And the euro profited inmensely from the common knowledge: “risk on is good because the central banks will not tolerate any negative outcome in the markets. Pick up yield (and risk).” This was particularly relevant for the euro because in the hunt for yield generated by the risk on trade, some sovereigns offered outstanding returns. The best public junk debt in the world, with the notable exception of Japan, is issued by euro sovereigns, in euros.

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