Contrary to the impression my constant long-term euro short posture might betray, I do not see the cataclysm in Europe as the end of the single currency, just the end of its present form. As the previous week’s last trading day again sparked risk appetite, lifting equities, bidding up euro, yen and pressuring the dollar, deep-rooted market uncertainty was best expressed in opposing takes of two leading investment banks – Goldman recommending going long euro-dollar all the way to 1.40, Morgan Stanley predicting the opposite, down to 1.30.
These are historic times indeed. Europe is flush with irony when it takes political guillotines in Athens and Rome for the euro to pare weekly losses, even if new setups will be just as helpless and the outlook just as grim as hawks in the forex market milk even the briefest news-pushed risk-on windows to the last drop. Papendreu sealed his fate by invoking public consent in matters concerning severe austerity, inviting scorn from Berlin and Paris, ultimately abandoning the referendum as well as the premiership. How a couple of millennia have changed the home of democracy. Berlusconi’s scalp, too, makes way for similar austerity, wage cuts, throw away privatisation, etc, signaling another elected leader’s collapse while political appointees dictate the continent’s future from command centres at the ECB, EMU and the like. I don’t understand Goldman’s optimism. There is no way Merkel and Sarkozy can talk the euro all the way to 1.40. The most they can do is engineer brief windows of false hope to provide brief, sure long-opportunities for dear friends. And that’s not all the bad news. Mr Market seems on the verge of vindicating another of this column’s positions. This week, the spread between French and German bonds rose to the highest levels since the euro was floated, according to Bloomberg. It didn’t help that S&P followed by erroneously announcing a downgrade in France’s ratings. Now it can’t be long before France becomes the next Italy as pundits explore its mounting deficits, its banks’ exposure to peripheral debt, its perilous all-or-nothing walk on the tightrope holding the fragile union together. Stay committed to the euro short. Sometimes others’ ignorance is our bliss! Resumption in yen-inflows also signal increased risk aversion around the corner as Tokyo’s intervention loses steam and the Japanese currency gained 1.4 per cent to $77.20, the biggest weekly climb since Aug 12. Commodity currencies will ride oil’s longest streak of weekly advances since Aug ’09, but it would be foolish to bank on Europe-centric news to continue providing fillip. Better than expected data from the US added to the relief, but such numbers have been playing hide-and-seek with the market for over two years, and cannot be trusted till a positive pattern emerges. As complex as the market situation is, trading ought to be just as simple. Strange, but true. Hope on the Merkozy risk bandwagon whenever they act sincere and genuinely attempt to fend off bad news, even if their sympathy is directed towards giant European financial institutions, not its governments or its people. And short with abandon whenever the market calls their bluff. Short term direction is a sure tell. Enjoy risk with euro, commodity currencies, even oil. Do just the opposite as soon as greed gives way to fear. The only plausible way forward for the eurozone is phased exclusion of debt-defaulters. After trying all medicines possible, the fatally sick must finally be let go of. Failing that, the financial malaise will turn increasingly political, with the monetary union turning fiscal/political, its core centre being Germany. Isn’t that just the eventuality the union was initially created to avert? Either way, the first phase of the euro is over. It must mould, or end, but cannot continue. This week delivers the end of the beginning.
