Dare I disagree with John Taylor, founder of the world’s largest currency hedge fund, as he calls for an aggressive euro short all the way to parity? That too especially when markets met my 1.30 euro-dollar call a good two months ahead of projection? Truth be told, if my crystal ball had the slightest idea EU leaders would meet so often, I would have chopped the extra two months off the call a long time ago. Every time Europe’s top guys meet to safeguard the single currency, they engineer brief windows of risk appetite at best, followed by a big squeeze. This time, risk was not stimulated at all. Either they have not noticed the trend, or it is deliberate. Else they’d just stop meeting so regularly.
I’m not surprised the euro recorded its worst weekly fall in three months. Or that it closed the lowest since January. Rating agencies’ going for big banks’ jugular on both sides of the Atlantic, France’s long-term outlook reduced to negative, and 15 of 17 sovereigns of the union likely to be downgraded early next year all mean the market is finally pricing in eventual disintegration of the euro. The summit proved a make-or-break event after all. As soon as stakeholders realised Merkozy had just stitched up a framework to diffuse future crises while doing nothing about the present one, they simply lost faith in the euro. Take hint from bloomberg’s finding that net euro shorts increased to 116,457 on Dec 13 from 95,814 a week earlier. Stay short, stay happy.
Cable (GBP-USD) presents the currency markets new dilemma. While Mervin King’s liking for currency weakening in favour of increased exports makes sense during recessions, sterling’s position must be evaluated in light of corresponding weakening of currencies of its most traded partners – China, EU and US. The yuan equation is not the most crucial. But Europe’s own weakness and subsequent euro devaluation is a formidable deterrent. And the US cross is volatile, both economies running printing presses overtime and engaging in quantitative easing. Eventually, the one that unleashes the greater monetary tsunami will weaken more (simple). Of course they will have to weigh other crucial variables (not so simple). For now cable remains trapped, unable to decide whether to bend towards safe-haven rise from Europe’s problems or weaken because of the domestic monetary overdose.
For the time being, best ride the good news from America while it lasts, and its positive impact in Asia. India’s rupee, South Korea’s won and Indonesia’s rupiah are on the rise, and should feel more confident about export earnings. Yet it’s important not to read too much into these numbers. America has a habit of recording cyclical, circumstantial consumer sentiment, retail and employment strength in the holiday season. Ironic, like much else in the forex market ever since the fateful collapse of Lehman Brothers in ’08 unleashed the mother of all recessions.