On FX

How about those FX markets of late? They’ve been an easy call, right? Actually I think there may be some blood in the streets. All the Euro bears are bleeding profusely. Those who played dollar Yen from the short side are having a miserable time. The short EURCHF trade has just gone to hell. But by far, the worst of the lot are those poor souls who thought that shorting the Yen crosses against the Europeans was such a hot idea. For them, well, there isn’t much that can be said.

We have a series of head fakes going on at once. The Japan story is on top of the list. In the days after the quake EVERYONE said that it HAD to mean that MASSIVE REPATRIATION would happen and HUGE CAPITAL would be returning to Japan. This thinking was well supported by the 1995 Kobe quake. Things got out of hand. The USDJPY dropped 5 big figures in just a few days. The BoJ cried out for help from the other CBs and we had a few hours of intervention and a bunch of headlines.

Utter bunk. There has been no repatriation of any significance at this point. The spike in the Yen was short covering (carry trade players). The CB’s paid them off. At about the same time the market was getting its faced ripped off by the CBs it was becoming increasing clear that what is happening in Japan has little to compare with 1995. At this point the only ones still crying, “This is no problem. It will be over in a day or two” are fools. There aren’t many fools trading FX. We now have a weak Yen story to trade. This trade is not over yet.

Think what would have happened to the Euro a year ago if Portugal had gone belly up. The street would have shot the currency for several big figures. A year later what happens when we get the news? The Euro closes at the high of the day. Go figure market sentiment.

The Portugal story is old news by now. The headline is just a confirmation of what we already know. The Euro has been trading higher against everything for some time. This runs counter to last year's logic. So why the price action? I think it might be a two-part answer.

If you look at CDS pricing there is not really much evidence that Spain is going to be the next axe to fall anytime soon. That perception may be a mistake, so watch that CDS pricing as a clue to where EURUSD is headed. As of today there is no panic in Spain. As long as that perception is held, the Euro will trade on the strong side.

The weak dollar conclusion is based on my perception that outside of the US there is increasing distrust of the dollar. Nearly every day there is another story in the papers that supports that view. America is financially out of control. Add in ZIRP as a policy that pays dollar holders nothing and it is easy to get bearish on the buck in general. Given that the Yen is not a place to go when shorting the US the Euro has to be the beneficiary.

On the CHF crosses, a simple rule. If the EURO has a bid, don’t short the CHF crosses. Play in a different sandbox.

Speaking of that CHFJPY cross, a reminder of an article of mine on 12/20/2010. “Trade against the SNB”. I pointed back then to an unusual reserve diversification move by the Swiss National Bank. Those fine fellows were getting pounded from the drop in the Euro and the losses they were facing as a result. In a desperate move they sold off some Euros and sought safety in the Yen (to the tune of JPY 1 trillion). The CHFJPY cross was at 82.50 when this bright move was made. The cross closed at over 93 today. The loss in the past three months? A cool 13%. That comes to CHF1.25b ($1.5b). And I thought those Swiss guys were so good at currency trading.

A grouping of Losers