Bought EUR1,000,000 sold USD at 1.3570 on Friday morning.
Tough decision, given that so many are convinced that the Euro is toast. But I think that the fall from 1.5100 to 1.3445 levels is probably enough. Everyone is short the Euro, with the result that there are no more serious sellers left.
I have also heard rumours that Chinese and Russian central banks are buyers of Euro in the 1.3400-1.3500 area.
Anyway, we will see what happens over the next few weeks.
Anyone agree with me? Or are you all convinced that I have finally lost it?
Sunday, 28 February 2010
Tuesday, 9 February 2010
Euro zone bond frenzy echoes past battles
PARIS Reuters Paul Taylor
The feeding frenzy in bond markets over highly-indebted southern euro zone states recalls the runs on European currencies in the 1990s before the euro was created.
European governments eventually saw off that challenge with a sustained display of political determination backed by central bank intervention to defend the European Monetary System.
Whether they can overcome the current panic about sovereign default risks in the single currency area by showing political resolve without mutual financial assistance remains to be seen.
Then as now, traders made money by probing perceived weak links in the EU, forcing the Italian lira and the British pound out of the Exchange Rate Mechanism in 1992 and repeatedly attacking the French franc.
Then as now, there were accusations that the attacks were driven by "Anglo-Saxon" speculators hostile to European monetary union. Markets went wild on Friday afternoon rumours of secret weekend meetings of European finance officials. After a four-year battle that began in 1992 when Denmark rejected the Maastricht treaty in a referendum, political will eventually prevailed over market forces.
The last great challenge to the franc-deutschemark exchange rate at the heart of the ERM was repelled in 1995 once new French President Jacques Chirac had made clear his determination to pursue orthodox fiscal policies. Today's debt crisis is both similar and very different. The mounting market frenzy feels eerily familiar.
It began with pressure on Greece, the country with the biggest public finance problems in the 16-nation euro area, but spread last week to Portugal and, to a lesser extent, Spain. The premium that investors demand to hold Greek bonds rather than benchmark German Bunds narrowed on media reports or rumours of an imminent European bail-out, or of Chinese interest in Greek debt, only to widen further on official denials.
Each strike call, parliamentary setback or glitch in routine debt management triggered a new sell-off or an increase in the price of insuring sovereign debt against default on the highly speculative credit default swaps (CDS) market.
Seasoned market watchers say the gyrations are mainly the work of short-term speculators and do not reflect a fundamental rethink about euro-denominated assets. "We don't see any fundamental moves at all. It's purely speculative," said Patrick Smith, senior investment manager at Santander Asset Management. That speculation is easier because markets are still awash with cheap liquidity injected by the European Central Bank to avert a credit crunch during the financial crisis.
Borrowing money from the central bank at 1 percent and lending it to Greece at nearly 7 percent on sovereign bonds in solid euros ought to be a hugely attractive investment. Yet big institutional investors are holding off, partly due to market volatility, but also because they want to see the Socialist government implement tougher public spending cuts. "Greece in the long term is probably a good play but we have to wait for the government to see more signs on the expenditure side," said Jorgen Christian Hansen of Danish pension fund Unipension. "The reason Greece is getting so much attention is that it is the first real test of the Euro-system in handling countries with excessive debt and too lax fiscal policies," he said.
EU governments will try to ride out the crisis without having to bail out Greece, or Portugal or Spain, by pressuring those countries to make draconian fiscal adjustments while declaring political support for them. A single comment from Germany's finance minister a year ago that the euro zone would have to help if a member got into a serious situation was enough to calm market fever over Ireland. The question is whether the EU can enforce budget discipline rules on peripheral euro zone states which its core members mostly failed to respect over the last decade. Compounding the problem, those countries have lost economic competitiveness, and austerity will further slow their recovery from recession. Euro zone countries cannot devalue their way out of trouble.
The alternatives for Greece are to make painful and politically risky cuts in public spending, to seek abail-out or to default. Athens has to refinance 54 billion euros in public debt this year, 20 billion of it in the second quarter. It faces a crunch at the end of the year if Moody's joins two other credit ratings agencies in downgrading Greek debt below A grade.
Unless the ECB changes its mind, that would cut Greek banks off from central bank refinancing operations by disqualifying their government bonds as collateral. Analysts say that would trigger a chain reaction of bank defaults.
Outgoing EU Monetary Affairs Commissioner Joaquin Almunia shrugged off such disaster scenarios in a Jan. 29 Reuters interview, underlining to the fickleness of financial markets.
You know the markets," he said. "On other occasions, they became nervous one day and receded a week afterwards. I'm sure they'll find something bigger to worry about soon."
The feeding frenzy in bond markets over highly-indebted southern euro zone states recalls the runs on European currencies in the 1990s before the euro was created.
European governments eventually saw off that challenge with a sustained display of political determination backed by central bank intervention to defend the European Monetary System.
Whether they can overcome the current panic about sovereign default risks in the single currency area by showing political resolve without mutual financial assistance remains to be seen.
Then as now, traders made money by probing perceived weak links in the EU, forcing the Italian lira and the British pound out of the Exchange Rate Mechanism in 1992 and repeatedly attacking the French franc.
Then as now, there were accusations that the attacks were driven by "Anglo-Saxon" speculators hostile to European monetary union. Markets went wild on Friday afternoon rumours of secret weekend meetings of European finance officials. After a four-year battle that began in 1992 when Denmark rejected the Maastricht treaty in a referendum, political will eventually prevailed over market forces.
The last great challenge to the franc-deutschemark exchange rate at the heart of the ERM was repelled in 1995 once new French President Jacques Chirac had made clear his determination to pursue orthodox fiscal policies. Today's debt crisis is both similar and very different. The mounting market frenzy feels eerily familiar.
It began with pressure on Greece, the country with the biggest public finance problems in the 16-nation euro area, but spread last week to Portugal and, to a lesser extent, Spain. The premium that investors demand to hold Greek bonds rather than benchmark German Bunds narrowed on media reports or rumours of an imminent European bail-out, or of Chinese interest in Greek debt, only to widen further on official denials.
Each strike call, parliamentary setback or glitch in routine debt management triggered a new sell-off or an increase in the price of insuring sovereign debt against default on the highly speculative credit default swaps (CDS) market.
Seasoned market watchers say the gyrations are mainly the work of short-term speculators and do not reflect a fundamental rethink about euro-denominated assets. "We don't see any fundamental moves at all. It's purely speculative," said Patrick Smith, senior investment manager at Santander Asset Management. That speculation is easier because markets are still awash with cheap liquidity injected by the European Central Bank to avert a credit crunch during the financial crisis.
Borrowing money from the central bank at 1 percent and lending it to Greece at nearly 7 percent on sovereign bonds in solid euros ought to be a hugely attractive investment. Yet big institutional investors are holding off, partly due to market volatility, but also because they want to see the Socialist government implement tougher public spending cuts. "Greece in the long term is probably a good play but we have to wait for the government to see more signs on the expenditure side," said Jorgen Christian Hansen of Danish pension fund Unipension. "The reason Greece is getting so much attention is that it is the first real test of the Euro-system in handling countries with excessive debt and too lax fiscal policies," he said.
EU governments will try to ride out the crisis without having to bail out Greece, or Portugal or Spain, by pressuring those countries to make draconian fiscal adjustments while declaring political support for them. A single comment from Germany's finance minister a year ago that the euro zone would have to help if a member got into a serious situation was enough to calm market fever over Ireland. The question is whether the EU can enforce budget discipline rules on peripheral euro zone states which its core members mostly failed to respect over the last decade. Compounding the problem, those countries have lost economic competitiveness, and austerity will further slow their recovery from recession. Euro zone countries cannot devalue their way out of trouble.
The alternatives for Greece are to make painful and politically risky cuts in public spending, to seek abail-out or to default. Athens has to refinance 54 billion euros in public debt this year, 20 billion of it in the second quarter. It faces a crunch at the end of the year if Moody's joins two other credit ratings agencies in downgrading Greek debt below A grade.
Unless the ECB changes its mind, that would cut Greek banks off from central bank refinancing operations by disqualifying their government bonds as collateral. Analysts say that would trigger a chain reaction of bank defaults.
Outgoing EU Monetary Affairs Commissioner Joaquin Almunia shrugged off such disaster scenarios in a Jan. 29 Reuters interview, underlining to the fickleness of financial markets.
You know the markets," he said. "On other occasions, they became nervous one day and receded a week afterwards. I'm sure they'll find something bigger to worry about soon."
Wednesday, 3 February 2010
Asia fiddles as inflation fears resurface
2 Feb 10 07:51:58, Alan Wheatley, China Economics Editor BEIJING (Reuters)
Last year was tough for Asia's economy but easy for its central bankers. All they had to do was flood their banking systems with lots of cheap cash and sit tight. But in 2010 they are going to have to earn their money.Worries about growth have quickly given way to concerns about inflation, and investors seem split down the middle about the capacity of central banks to rise to the challenge.
As global jitters over China's initial tightening of monetary policy demonstrate, some fear the response will be too harsh. Others, though, fret that some central banks, for instance in India and South Korea, are already falling behind the policy curve and will upset financial markets when they are finally forced to squeeze inflation out of the system.
For when it comes to monetary policy, a stitch in time often really does save nine. Rob Subbaraman, chief Asia economist at Nomura in Hong Kong, said the biggest risk facing Asia was that of an unexpected surge in commodity prices driving up inflation. Part of the problem is that policymakers, still fearful of an economic double-dip in the West, are wary of withdrawing fiscal stimulus and do not want their currencies to rise too fast.
And because the Federal Reserve is unlikely to raise U.S. interest rates until the second half of this year, Asian central banks will probably keep their own rates too low for too long for fear of attracting speculative money. As a result, Nomura expects inflation-adjusted borrowing costs in eight of the 12 countries it tracks to be negative by June -- a recipe for bubbly domestic demand and asset prices."When we look at the region now collectively, monetary and fiscal policies have never been so loose," Subbaraman said.
SLOWLY DOES IT
J.P. Morgan expects interest rates to be rising in some countries by early spring, but at a tepid pace relative to Asia's economic backdrop. The bank's economists reckon the average interest rate in emerging Asia will remain three percentage points below the level implied by a widely followed rule of thumb devised by the U.S. economist, John Taylor.
Central banks, a number of them under political pressure to keep borrowing costs low, instead have contented themselves so far with measures to mop up some of the surplus cash they injected into their economies. "Normalisation" of super-loose policy, not tightening, is the ugly buzzword. For instance, India and China last month increased the proportion of deposits that banks must keep with the central bank, instead of lending them out, while the Philippines raised a rate on a short-term lending facility. None of them increased their benchmark interest rates.
Given that the Reserve Bank of India on Friday issued a sharp warning over inflation at the same time as it tightened required reserves, a half point increase in interest rates is likely to follow next month, Prakriti Sofat and Rahul Bajoria of Barclays Capital said."However, based on our meetings with a number of Asian central banks, the clear theme is that policymakers remain cautious, and the risks are that rate hikes may be delayed," they wrote in a report.
NEW FOOD SPIKE?
The case for pre-emptive action is based not only on Asia's rapid economic recovery, which is absorbing the spare capacity and excess labour needed to keep a lid on prices. It is also justified, some economists believe, because a repeat of the 2007/2008 spike in global food prices is taking shape.
Western central banks play down passing increases in the cost of food because it typically accounts for just 10-15 percent of the consumer price index. In Asia ex-Japan, though, food makes up 30-35 percent of the CPI, so a jump can quickly boost overall inflation and harden expectations of a price spiral.
Glenn Maguire, chief Asia economist at Societe Generale in Hong Kong, is among the worriers. He says the upswing in food commodity prices since 2004 has been rivalled only twice in the last century -- in the 1930s during the recovery from the Great Depression and during the commodity boom of the 1970s.
He postulates that China could be having a profound impact on food inflation as strong income growth, rapid urbanisation and westernisation of the local diet boost demand."The speed at which inflation is turning in Asia argues for a much more prudent stance on policy, and there are few Asian economies that should be exempt from tightening over the course of 2010," Maguire said.
DON'T PANIC, YET
A more optimistic view comes from economists Silvia Liu and T.J. Bond at Bank of America Merrill Lynch in Hong Kong. Leaving aside China and India, the only two countries with billion-plus populations, the economists said year-on-year food inflation had moderated in Asia to 1.3 percent in the fourth quarter of 2009 from 4.8 percent in the second quarter. The memory of 2008, when inflation peaked in mid-year at 8.5 percent, up 5.6 percentage points from the year before, remains vivid, Liu and Bond wrote in a weekly report.
But they think a better comparison is with 2004, when inflation crested at 4.2 percent, up 2.6 points from the year before.They expect Asian inflation to accelerate to 3.5 percent in 2010 from 0.7 percent in 2009.But they acknowledged that conditions could change. "In particular, if China maintains a rigid FX regime, the entire region may find it difficult to tighten monetary policy, given the low levels of U.S. rates. As a result, asset prices, money, and credit growth could all rise, raising inflation risks in 2011. This is the key risk we will monitor over the course of the year," they wrote.
Last year was tough for Asia's economy but easy for its central bankers. All they had to do was flood their banking systems with lots of cheap cash and sit tight. But in 2010 they are going to have to earn their money.Worries about growth have quickly given way to concerns about inflation, and investors seem split down the middle about the capacity of central banks to rise to the challenge.
As global jitters over China's initial tightening of monetary policy demonstrate, some fear the response will be too harsh. Others, though, fret that some central banks, for instance in India and South Korea, are already falling behind the policy curve and will upset financial markets when they are finally forced to squeeze inflation out of the system.
For when it comes to monetary policy, a stitch in time often really does save nine. Rob Subbaraman, chief Asia economist at Nomura in Hong Kong, said the biggest risk facing Asia was that of an unexpected surge in commodity prices driving up inflation. Part of the problem is that policymakers, still fearful of an economic double-dip in the West, are wary of withdrawing fiscal stimulus and do not want their currencies to rise too fast.
And because the Federal Reserve is unlikely to raise U.S. interest rates until the second half of this year, Asian central banks will probably keep their own rates too low for too long for fear of attracting speculative money. As a result, Nomura expects inflation-adjusted borrowing costs in eight of the 12 countries it tracks to be negative by June -- a recipe for bubbly domestic demand and asset prices."When we look at the region now collectively, monetary and fiscal policies have never been so loose," Subbaraman said.
SLOWLY DOES IT
J.P. Morgan expects interest rates to be rising in some countries by early spring, but at a tepid pace relative to Asia's economic backdrop. The bank's economists reckon the average interest rate in emerging Asia will remain three percentage points below the level implied by a widely followed rule of thumb devised by the U.S. economist, John Taylor.
Central banks, a number of them under political pressure to keep borrowing costs low, instead have contented themselves so far with measures to mop up some of the surplus cash they injected into their economies. "Normalisation" of super-loose policy, not tightening, is the ugly buzzword. For instance, India and China last month increased the proportion of deposits that banks must keep with the central bank, instead of lending them out, while the Philippines raised a rate on a short-term lending facility. None of them increased their benchmark interest rates.
Given that the Reserve Bank of India on Friday issued a sharp warning over inflation at the same time as it tightened required reserves, a half point increase in interest rates is likely to follow next month, Prakriti Sofat and Rahul Bajoria of Barclays Capital said."However, based on our meetings with a number of Asian central banks, the clear theme is that policymakers remain cautious, and the risks are that rate hikes may be delayed," they wrote in a report.
NEW FOOD SPIKE?
The case for pre-emptive action is based not only on Asia's rapid economic recovery, which is absorbing the spare capacity and excess labour needed to keep a lid on prices. It is also justified, some economists believe, because a repeat of the 2007/2008 spike in global food prices is taking shape.
Western central banks play down passing increases in the cost of food because it typically accounts for just 10-15 percent of the consumer price index. In Asia ex-Japan, though, food makes up 30-35 percent of the CPI, so a jump can quickly boost overall inflation and harden expectations of a price spiral.
Glenn Maguire, chief Asia economist at Societe Generale in Hong Kong, is among the worriers. He says the upswing in food commodity prices since 2004 has been rivalled only twice in the last century -- in the 1930s during the recovery from the Great Depression and during the commodity boom of the 1970s.
He postulates that China could be having a profound impact on food inflation as strong income growth, rapid urbanisation and westernisation of the local diet boost demand."The speed at which inflation is turning in Asia argues for a much more prudent stance on policy, and there are few Asian economies that should be exempt from tightening over the course of 2010," Maguire said.
DON'T PANIC, YET
A more optimistic view comes from economists Silvia Liu and T.J. Bond at Bank of America Merrill Lynch in Hong Kong. Leaving aside China and India, the only two countries with billion-plus populations, the economists said year-on-year food inflation had moderated in Asia to 1.3 percent in the fourth quarter of 2009 from 4.8 percent in the second quarter. The memory of 2008, when inflation peaked in mid-year at 8.5 percent, up 5.6 percentage points from the year before, remains vivid, Liu and Bond wrote in a weekly report.
But they think a better comparison is with 2004, when inflation crested at 4.2 percent, up 2.6 points from the year before.They expect Asian inflation to accelerate to 3.5 percent in 2010 from 0.7 percent in 2009.But they acknowledged that conditions could change. "In particular, if China maintains a rigid FX regime, the entire region may find it difficult to tighten monetary policy, given the low levels of U.S. rates. As a result, asset prices, money, and credit growth could all rise, raising inflation risks in 2011. This is the key risk we will monitor over the course of the year," they wrote.
Monday, 1 February 2010
Position Update
Have been away on leave in Australia, and have been very slack about updating...apologies!!
Here are the trades I am active in:
AUD/JPY
Long AUD 3,735,990.04 short JPY at 82.79 average.
Current rate: 79.64
Current: Loss 315 points
Comment:
See AUD/USD comments below.
USD/JPY: Japan is set to again increase quantitative easing, especially with the Yen strength in recent weeks. Given the overall USD weakness, the Yen will settle in the 95-100 area, with the Euro itself making all the longer term gains against the USD.
Still have a longer-term target in the AUD/JPY cross of 105.00. I am happy with the current exposure.
NZD/JPY
Long NZD 3m short JPY at average of 57.23.
Current rate: 63.28
Current: Gain 605 points.
Comment:
See Yen comments in AUD/JPY above. See NZD/USD comments below.
I am happy with the current exposure.
EUR/USD
Square
Current rate: 1.3880
Comment:
I must admit I have been surprised by the USD strength in recent weeks. Euro money supply is shrinking. US money supply is expanding. The USD must weaken against the Euro in the long run as a result. Overall I see the USD weakening considerably due to ongoing quantitative easing pressures. Remember Europe is not in a QE stance. Europe will raise interest rates before the US does.
I will add a new position EUR1m long if we see sub 1.3600.
AUD/USD
Long AUD 2m short USD at 0.8670.
Current rate: 0.8820
Current: Gain 150 points.
Comment:
Here are the trades I am active in:
AUD/JPY
Long AUD 3,735,990.04 short JPY at 82.79 average.
Current rate: 79.64
Current: Loss 315 points
Comment:
See AUD/USD comments below.
USD/JPY: Japan is set to again increase quantitative easing, especially with the Yen strength in recent weeks. Given the overall USD weakness, the Yen will settle in the 95-100 area, with the Euro itself making all the longer term gains against the USD.
Still have a longer-term target in the AUD/JPY cross of 105.00. I am happy with the current exposure.
NZD/JPY
Long NZD 3m short JPY at average of 57.23.
Current rate: 63.28
Current: Gain 605 points.
Comment:
See Yen comments in AUD/JPY above. See NZD/USD comments below.
I am happy with the current exposure.
EUR/USD
Square
Current rate: 1.3880
Comment:
I must admit I have been surprised by the USD strength in recent weeks. Euro money supply is shrinking. US money supply is expanding. The USD must weaken against the Euro in the long run as a result. Overall I see the USD weakening considerably due to ongoing quantitative easing pressures. Remember Europe is not in a QE stance. Europe will raise interest rates before the US does.
I will add a new position EUR1m long if we see sub 1.3600.
AUD/USD
Long AUD 2m short USD at 0.8670.
Current rate: 0.8820
Current: Gain 150 points.
Comment:
I believe the Australian economy remains extremely well placed to benefit from the commodity demand, especially with China still growing strongly. I expect an interest rate increase from Australia, either tomorrow or in March. I still believe that the AUD/USD has a long way higher to go yet. Target remains 1.0000.
I will add to positions if AUD/USD 0.8600 is seen.
NZD/USD
Long NZD 2m short USD at .7160.
Current rate: 0.7010
Current : Loss 150 points.
Comment:
The NZD/USD is following the AUD/USD, and to some extent the EUR/USD moves. As we are now in the export season for New Zealand, upward pressure will intensify. This will compound when the RBNZ raises interest rates in April this year. The NZD/USD still has a long way higher to go yet. Target remains the highs of 0.8216.
I will add to positions if NZD/USD 0.6800 is seen.
Unrealised gains NZD130k (AUD/JPY -148, NZD/JPY +287k, AUD/USD +34k, NZD/USD -43K).
Total gains banked since August 2007:
NZD2,344,360.38
I will add to positions if AUD/USD 0.8600 is seen.
NZD/USD
Long NZD 2m short USD at .7160.
Current rate: 0.7010
Current : Loss 150 points.
Comment:
The NZD/USD is following the AUD/USD, and to some extent the EUR/USD moves. As we are now in the export season for New Zealand, upward pressure will intensify. This will compound when the RBNZ raises interest rates in April this year. The NZD/USD still has a long way higher to go yet. Target remains the highs of 0.8216.
I will add to positions if NZD/USD 0.6800 is seen.
Unrealised gains NZD130k (AUD/JPY -148, NZD/JPY +287k, AUD/USD +34k, NZD/USD -43K).
Total gains banked since August 2007:
NZD2,344,360.38
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