On FX - Shit or go Blind?

Way back in the mid 70s I was a Snake trader for a bank. This was a period before the EURO was adopted. The European currencies had established trading bands of 2-3% against each other. This was pre computer days, so figuring out where markets where vis a vis the 7 currencies was disorderly. There were arbs all the time as things got mis-priced. Fertile land for FX types.

The front of the Snake was the old Deutche Mark. The back of the Snake was the Italian Lira. I traded the back end. It was a hoot.

I met a guy. He was connected. We traded info, took positions and everyone made money. There was one weekend where the rumors were rife that the Italian Lira would be suffering a big devaluation. The market chatter was for a 20% move.

But my guy and I had the inside story that this weekend was not going to bring a devaluation. The then Prime Minister and Finance Minister were digging in their heels, is what we were told. So we bet the other side. We went long the Lira for Friday delivery and planned to hold it over the weekend. By having the liquidity we were able to lend it out to all of those who were betting big on the short side. The weekend repo was worth an easy 5%. This is a 3 to 1 bet against you, so you have to be damn sure of the outcome. We thought we were.

In the NY afternoon the Italian Finance Minister said something that changed the picture. The guy we were counting on to hold the line for another few days was on the wire saying there was a crisis meeting that weekend.

So I called my pal (who also had big positions) and asked, “What should we do?” He says right back to me:

Mate, I don’t know if I should shit or go blind.

These words mean nothing by themselves. The implication was crystal clear. He no longer had a clue what would happen next. I hung up. Dumped the position at a loss.

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I was looking at some EURUSD charts today. Some of the other big crosses as well. I’m of the view that there are some big currency moves in front of us. There is news twice a day that’s pushing size money around. Central Banks are involved in unprecedented ways. Volatility is way up. Interbank volume is big, futures too. These are the conditions that bring market breaks.

But I can’t decide what to bet on. The question “What should I do?” reminded me of that old story.

The last few trading days provide some directional signals. On Friday the thinking was that we would have Drachmas on Monday. That logic pushed the EURUSD to close on the lows. This morning we have a bid under the Euro against the crosses as the Greeks didn't move. Late in NY there is a silly story about China buying Italian bonds (They’re talking their book) and the Euro closes higher on the day.

Okay. That is the trade pattern the market is pointing to. If Europe is going to have a few peripherals walk out of the (monetary) clubhouse then the Euro is headed south for the fall and the winter too. "Ride this baby to 1.20 or better"; is the talk I keep hearing.


Really? I’m not so sure about that at all.

You would not want to be short the Euro if we woke up some morning and found that the Euro members were narrowed down to France, Germany, Italy, Netherlands (and Belgium too). That group of countries would trade to EUR1.5+ against the dollar. Forget those stop losses you think you have.

Keep in mind that the pendulum is going to swing against the USD at some point in the future. Things are not so hot in the USA these days. We probably will have a mini crisis by the end of the month over the Continuing Resolution.

To me, the short side of the Euro comes to play if there are more and more steps adopted that attempt to keep the bucket from leaking. More EFSF, CBs lending to banks, new austerity steps and the like. The “United Europe Uber Ales” outcome is the short EUR story IMHO. They will never succeed if that is the goal.

But that is not how the markets are trading this. The thinking is quite the other way around. So I’m left wondering if I should shit or go blind.

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