Well, it doesn’t happen all the time, but the EURUSD has performed exactly as expected since our last post. And not only this pair; if you were short the Euro, you are “in the money” against most currencies. As I said then, it doesn´t get any better than this. The trade makes fundamental sense, and we have the POMO desk of the ECB covering our back. Sex has been good lately.
No overconfidence though. Nothing is really 100% foolproof, particularly in these turbulent times. Only two days ago, Saxo bank research came out with a long the EURUSD recommendation, with a target at no less than 1,40. Wow! I have great respect for them, and the rationale for the trade certainly makes sense. They think US interest hike fears are overblown. Most likely they are; but in my view, not to forget is the other side of the trade. The European growth scare is consolidating daily, and we are on target for the end of the year stagnation I suggested in “reading this and long time short the EURUSD”. Last figures show zero GDP growth for Europe in the second quarter (and likely coming down further in the third and fourth). Doesn’t look like the recovery everybody was expecting. I very much doubt the euro can withstand the dismantling of the growth prognosis now embedded in financial pricing in most of continental Europe. Some weakness looks unavoidable, even if we end up with a new “whatever it takes”, or similar wording, by super Mario. I think I will stick to the same sex partner (euro shorts) for the time being. A weak euro should help with some nice and reasonably safe sex over the next weeks.
Apart from our trade, Dollar longs and Euro shorts are the main theme in currency crosses. I am less certain of the longs. After all, the Fed is still a glamorous acronym for a bunch of money printers that have promised to abandon their addiction beginning tomorrow … or the day after. We have to remain a touch skeptical. Add the fact they don´t like the dollar to appreciate, because they are aware of the tightening of financial conditions implied by currency appreciation. Tightening is still anathema at the Fed. They fire you if they find out you ever dreamt of it.
Last in the main currency arena, the yen is a gambling choice. The country is bankrupt and sports sustained commercial deficits as a new part of the economic landscape. But it is also a large creditor, and still considered a safe haven by a large mass of ill-informed investors. Beware of behavioural economics. Millions of idiots can alter the investment outlook for “longer than you can stay solvent” (oh yes, I have something in common with J.M. Keynes).
It does makes sense to short the yen (long USDJPY) only if combined with a S&P500 futures contract short. “Risk on”-“risk off” wise, it balances out the trade, making it theoretically neutral to both scenarios. It is indeed difficult to imagine JPY appreciation combined with S&P500 further increases to the 2000 to 2250 area. Be careful with sizing both sides of the trade adequately: in most trades the devil is in those details. Timing the entry levels is tricky as well.