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The answer to "What's going to give the Fear Index a boost ?" was staring us in the face all along .... The threat of Thermonuclear War,...

August 11, 2017

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The Euro bandwagon makes perfect sense of course , but be careful ..... there's no such thing in markets as a foregone conclusion. ref :- "Investors Jump Back Into the Euro as Going Short Proves "Lethal" " , Bloomberg Market

August 8, 2017

 

 

 

 

The Euro bandwagon makes perfect sense of course , but be careful ..... there's no such thing in markets as a foregone conclusion.

 

ref :- "Investors Jump Back Into the Euro as Going Short Proves "Lethal" " , Bloomberg Markets

 

Everything's easier with the benefit of hindsight, and nothing more so than trading. What were all those people thinking at the turn of the year when they were calling for a continuation of the strong dollar story which saw EUR / USD make a 14yr low around $1.04 in January ? Just look at it now .... the Euro made a 3yr high last week at $1.1910 (last at 1.1810), it's the best G10 performer in 2017 and from the sound of this piece the world and his wife are betting that it goes higher still.

 

People tend to forget of course, especially if they were one of those who got it wrong (and let's face it, there's an awful lot of them). Just as there are now good reasons for the Euro rally, there seemed to be equally sound logic in January for buying the greenback. Even those mildly horrified by Mr Trump's election victory had to concede that in amongst the new President's more shocking intentions were plans for tax-cutting and infrastructure spending for example that seemed likely to significantly boost growth, inflation and interest rates. A stronger dollar would be the natural consequence of such policies . As it turned out, even his fiercest critics would have struggled to predict quite what a mess Mr Trump and his new administration would make of things politically, which of course has hamstrung their ability to get anything done on the fiscal front. 

 

Also difficult to predict at the time was the strength of the Eurozone recovery, with higher-than-expected growth, steadily falling unemployment, and concerns over the Italian and Spanish banking systems safely negotiated (for now at least, and more than a touch controversially in the Italian case). The brighter picture has even led to speculation that the European Central Bank might soon begin the task of reining back the monetary stimulus, which of course would be supportive for the currency.

 

But when it comes to EUR / USD, probably the biggest factor in the reversal of the 3yr bullish trend for the dollar has been the wildly contrasting political developments in the two areas. In Europe, we have seen populist parties likely to be a threat to Eurozone unity soundly beaten in a number of crucial elections, with the resounding victory of France's strongly pro-European Emmanuel Macron the most significant. In the US on the other hand, we've seen the Trump administration lurch from one self-made and barely believable crisis to the next, with unsurprising effects on the market's confidence in its ability to fulfill its promises, economic or otherwise.

 

Bloomberg picks out four types of market player climbing aboard the Long Euro / Short US Dollar bandwagon :

 

Hedge Funds ..... according to Commitment of Traders reports published by the CFTC (Commodity Futures Trading Commission), hedge funds were still net-bearish on the Euro until May and would have had a painful start to the year. Since that time, speculators have piled into Euro bullish positions and have built up the biggest long-euro position in six years. Fast-money traders using momentum and trend-following strategies would have reversed their bets a lot earlier, and there's also a general perception that economic and political fundamentals mean that now is the time for the Euro to recover from long-term undervaluation.

 

US Investors ..... US investors are increasingly looking overseas for returns, and as a group they are the biggest potential driver of equity inflows into Europe. Making their Euro-denominated investments would by definition require buying Euro / selling US dollar, a position that they are unlikely to hedge for the most part.

 

European Investors ..... the Euro has shaken off its inferiority complex. The economic recovery in Europe and the settling of political concerns, allied with a possible lessening of monetary stimulus, has allowed "home" investors to repatriate their cash to pursue local investments that require no currency risk. At the same time, European companies that earn revenue in dollars will be hedging a fall in the value of the US unit by buying Euros.

 

Central Banks ..... managers of national reserves are traders too. Just like a fund manager or even a private individual, central banks found the Euro less appealing as a reserve currency when Europe was beset by the Greek debt crisis and political turmoil, and ran down their holdings accordingly. Now that Europe's political scene has settled down  --  in contrast to that in the States (the dollar is by far the world's leading reserve currency)  --  central banks may begin to rebuild their euro holdings at the expense of the dollar.

 

As we were saying, the logic is perfectly sound and we have no particular argument with it. One of the fund managers quoted in the Bloomberg article now sees EUR / USD as high as $1.30 by year-end, which sounds toppy but is not impossible. But regulars will know that we get a bit nervous when market players, particularly the volatile speculators, get positioned a bit "one-way" about things. It's not that the reasoning is wrong, but we start wondering about things like timing  --  are we still happy to pile into the Euro now that it's already rallied 14% this year ? And if we are, what could go wrong ? What could possibly reverse sentiment that seems so firmly entrenched ?

 

Well, that's something that you have to consider with every trade, of course. In this instance, we might suggest that Friday's US inflation data might be of interest. July Consumer Price Index (CPI) is due up 1.8% year-on-year (from 1.6% in June), with CPI ex-food and energy expected at 1.7% (from 1.7%). Any suggestion that inflation concerns haven't gone missing entirely after all might cause some to pause before shorting the dollar, at least in the short-term. And in the wider scheme of things, what if the Trump administration do manage to put something together on taxes say, the most "do-able" of his plans ?

 

On current form, that doesn't seem likely anytime soon ..... but it could happen, that's all we're saying. And if it does, those speculators could all be positioned in the same direction ..... the wrong one. Cue panic ....

 

Be careful out there .....

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