Some interesting currency moves today

[JR8]

There's no doubting who thinks it rules the Europe of supposed equals.


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'In Germany, Der Spiegel reports that Angela Merkel thinks Greece can be ejected safely from the euro, if the rebel Syriza party wins the elections on January 25 and carries out its pledge to tear up Greece’s hated “memorandum” with the EU-IMF “Troika”. The German Chancellor’s team are blanketing the airwaves in what looks like a campaign to drive the threat home.

“We are past the days when we still have to rescue Greece,” said Michael Fuchs, the parliamentary leader of Mrs Merkel’s Christian Democrats. “The situation has completely changed. It is entirely different from three years ago when we didn’t have the backstop defences in place. Greece is no longer 'systemically relevant’ for the euro.” He added wickedly that the single currency might actually be stronger without the Balkan troublemaker.

It was revealed last week that Germany offered Greece a “friendly” return to the drachma in 2011. Months later, Mrs Merkel was prepared to eject Greece from EMU altogether. Tim Geithner, the former US Treasury Secretary, said the Europeans seemed determined to teach Greece a lesson: “They lied to us, and we’re going to crush them,” was the gist of it. Mrs Merkel retreated only after it became clear that Spain and Italy would be engulfed by contagion if Greece was thrown out.

This time, Berlin seems almost eager to finish the job. Yet Syriza’s ice-cool leader, Alexis Tsipras, is equally convinced that the EU elites will back down, knowing that they have invested too much political capital in Greece’s salvation to walk away. After all, the sums involved now are tiny compared to the €245 billion in loans already dispersed since the crisis erupted in May 2010. Surely, after having claimed so confidently that the crisis was essentially over, Mrs Merkel can hardly admit that her strategy has failed?' [continues]
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http://www.telegraph.co.uk/finance/comm ... gn=3812299

[aster]

There's no doubting who thinks it rules the Europe of supposed equals.

As much as I don't want to see them dominate other aspects, I think the currency is one area where I'd give the Germans 100% control and tell everyone else to find something better to do.

[JR8]

The euro is at a four year low and Germany has just gone into recession. Are you sure they're equipped to be in charge of the European economy when their own domestic one is doing so poorly?

[aster]

I think they're doing so on purpose, trying to equate the Euro with the USD (or rather just let the Euro devalue in the near future) to stimulate the economy. The US sent its own Dollar down the drain to 1.60+ against the Euro at one stage, and let's not forget that when the Euro was launched it was at first valued at below parity with the USD.

IMO the big question is where Switzerland stands in all of this. This is a country with 100%, uttermost and unwavering faith in the Euro. It has openly risked the entire economy and its fiscal responsibility on this very notion, such is their belief and faith in the Euro. In an unprecedented move that I cannot equate to anything else in fiscal matters during my lifetime, they've decided to... PEG the Swiss currency to the Euro at 1.20. They will allow their currency to rise, but not fall below that level in relation to the Euro.

This is of course good news for those who want to hold Euros. Of course right now there are other, much better currencies to invest in, but at the end of the day the biggest safety-net of all is that you can always bail out of the Euro and switch your currency holdings to the Swiss Franc... RISK FREE!.

[Wd40]

SGD @ 1.335. Yesterday night it was at 1.34!

[JR8]

I think they're doing so on purpose, trying to equate the Euro with the USD (or rather just let the Euro devalue in the near future) to stimulate the economy. The US sent its own Dollar down the drain to 1.60+ against the Euro at one stage, and let's not forget that when the Euro was launched it was at first valued at below parity with the USD.

The US economy tanked, they embarked on Quantitave Easing to try and breath life into it. It’s arguably worked, and the program recently ended. http://www.bloombergview.com/quicktake/ ... asing-tape

I do not recall any specific plan for the euro to have a pegged exchange rate against the US$. How could it, and why would they want it to. If they did, then why not peg it also vs their major external trading partners, for example China?
Europe had a pre-cursor to the euro, and it was called the ECU (ticker: XEU). It was a synthetic currency that banks traded, but it did not exist in physical form. Every member of the later euro-zone had their domestic (‘legacy’) currencies floated vs the ECU. Before the birth of the euro the pegs between the ECU and legacy currencies were decided and fixed. Those rates, to six decimal places, were used over that veeeery long big-bang weekend back in the late 90s, when all legacy funds and assets (right down to small-business accounts, and even supermarket cash-tills) across the euro-zone were redenominated into euro.

As Germany was the biggest economy in the EU, it followed that the pegs mostly referenced the legacy Deutsche-mark. I.e. thus the fate of the euro-zone was inextricably tied to the historic German economy, together with it’s then very strong and rigidly managed currency. This goes back to my earlier comment that it required the ‘feckless’ Greeks to overnight become just like model Germans. Only empire-building north European politicians could imagine that that was even remotely possible. And so here is the inevitable result, the obvious that was always going to and had to happen, delivered up brutally like a bowl of cold vomit.

Even during that weekend there was a feeling (you might recall my direct involvement) perhaps similar to that that Orville Wright must have had on his first successful flight, i.e. ‘Is this bird really going to fly, well here goes!?’. The plan was set, the tracks were greased, the pride and currency of a continent rested upon it.

The Club-Med countries as is their habit took the whole summer off (our Milan office had a project plan forced out of them in about March that year that went ‘Jan, Feb, Mar, Apr, May, Sep, Oct, Nov, Dec’ – Me: ‘WTH is this? You’ve missed off three whole months!’ Them: ‘You don’t understand, Italy is on holiday in the summer, the office is shut’). Our one-man-and-his-son IT vendor in Vienna decided to literally try and hold us to ransom, as only he could locally recode/convert the system. By about June we realised it simply wasn’t going to happen, so we had to have an entirely new system designed and installed, that could later deal with the conversion. My point is that the euro got launched by the skin of it’s teeth, and with a lot of really messy manual patches. More significantly countries that weren’t economically ready (Greece, Spain, Portugal etc) were still quietly ushered in with a smile. A recipe for disaster, that intentionally had no exit-door.

IMO the big question is where Switzerland stands in all of this. This is a country with 100%, uttermost and unwavering faith in the Euro. It has openly risked the entire economy and its fiscal responsibility on this very notion, such is their belief and faith in the Euro. In an unprecedented move that I cannot equate to anything else in fiscal matters during my lifetime, they've decided to... PEG the Swiss currency to the Euro at 1.20. They will allow their currency to rise, but not fall below that level in relation to the Euro.

There is an expression back home ‘gilding a dog-turd’, i.e. the futile exercise of gold plating a dog-poo for the sake of appearances If the Swiss had faith in the euro they would have joined it, either at it’s launch or subsequently. So rather than having faith in the euro it was the opposite, they were forced to move to protect their currency against the tidal wave of funds from the euro-zone seeking a more stable home.

‘ THE SWISS National Bank (SNB) has fixed its currency against the euro at a rate of 1.2 Swiss francs, after its value rose sharply due its status as a safe haven investment amid the troubled eurozone countries.’
http://www.theweek.co.uk/business/2433/ ... franc-euro

‘The central bank introduced its foreign exchange target back in September 2011, when investors bought up massive amounts of the Swiss franc as a safer foreign exchange alternative to the euro or the dollar. This caused the value of the franc to appreciate steeply, threatening the health of Swiss exporters.’
http://www.cnbc.com/id/101267419

‘The Swiss National Bank in effect devalued the franc, pledging to buy "unlimited quantities" of foreign currencies to force down its value. The SNB warned that it would no longer allow one Swiss franc to be worth more than €0.83 – equivalent to SFr1.20 to the euro – having watched the two currencies move closer to parity as Switzerland became a "safe haven" from the ravages of the eurozone crisis.
http://www.theguardian.com/business/201 ... franc-euro


It is important to recognise that this was achieved via a defensive cap, and not a ‘we want to be just like you’ peg. The Swiss Franc faced being so heavily bought that without it it would have rendered the Swiss economy perhaps permanently uncompetitive.

Refer: Even now the SwF/ChF faces huge pressures and renewed waves of euro funds seek a haven...
http://www.futuresmag.com/2014/11/10/sw ... s-euro-peg

So much so that speculators are seeking ‘to do a Soros’ and test if not break the ChF/Eur capped rate.
http://www.globalcapital.com/article/pr ... ro-tumbles

This is of course good news for those who want to hold Euros. Of course right now there are other, much better currencies to invest in, but at the end of the day the biggest safety-net of all is that you can always bail out of the Euro and switch your currency holdings to the Swiss Franc... RISK FREE!.

I don’t think the Swiss would agree, if their actions aren’t clear enough, how about this for a taster?
‘Don’t Peg the Swiss Franc to an Institutionally Insane Currency’
http://www.currentconcerns.ch/index.php?id=1320

... but yes you’re right, people have been bailing out of the euro and buying the Swissie for a long time now. The ChF is a victim of it’s unplanned relative success. Perhaps similar to how the S$ faces the challenges of being a regional safe-haven.


p.s. Pedantic Trivia: It’s euro, rather than Euro. The Germans write it as Euro in German, because German is unique in capitalising nouns...

[JR8]

Here's one from the papers today to make your eyes water...

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'EMU deflation is the final betrayal of southern Europe
The victim states of southern Europe have retrenched heroically, yet deflation effects are overwhelming them.

The eurozone has let it happen. Europe's authorities have so mismanaged monetary and fiscal strategy that the whole currency bloc has tipped into deflation.

The drop in the eurozone's headline price index to -0.2pc in December scarcely captures the significance of what is happening. Deflationary forces have been gaining a grip on all the crisis states of the South for 18 months.

A chorus of economists began warning two years ago that the region was sailing close to the wind by letting inflation drift ever lower, leaving itself one shock away from a loss of policy traction. That shock is now hitting in successive waves: the Russia crisis; China's over-investment glut; and now the collapse of oil prices.

Textbook theory suggests that a halving of energy costs should be cause for celebration, a tax cut for consumers. It is very different calculus when inflation is already zero, bond yields are plummeting to 14th century lows across the world, and market psychology is becoming "unhinged" - to use central banking vernacular.

“Normally, any central bank would prefer to look through a positive supply shock," said Peter Praet, the European Central Bank's chief economist. "But we may not have that luxury at present. Shocks can change: in certain circumstances supply shocks can morph into demand shocks via second-round effects."

Mr Praet said families and firms are already adapting pre-emptively to the new order, describing what amounts to a classic deflation trap. "There is a risk of a real economic vicious cycle: less investment, which in turn reduces potential growth, the future becomes even grimmer and investment is reduced even further," he told Börsen-Zeitung.

Mr Praet warned that an "underemployment equilibrium" is setting in, invoking the term used by Keynes in the 1930s. He exhorted "all the authorities", including governments, to step up to their responsibilities and take "urgent action". This is a man who knows that monetary union is in deep crisis.

His boss, Mario Draghi, has been bending every sinew for a long time to head off this awful moment. He went to Berlin as far back as November 2013 to plead for understanding from Germany's economic elites, warning even then that radical measures were needed to secure a “safety margin against deflationary risks”. He feared that the downward slide was pushing EMU crisis countries into a deeper rut as they tried to claw back competitiveness. "Real debt burdens rise,” he said.

Mr Draghi did not invoke Irving Fisher's classic text published in 1933 - Debt-Deflation Theory of Great Depressions - but his message was the same. Falling prices are not benign in highly-leveraged economies.

There comes a point when the sailing ship does not right itself by the normal swing of the cycle. It tips too far and capsizes. Try to right it then. The Japanese are still trying 15 years later.

There have been incessant promises of ECB stimulus since that speech in Berlin but little has been done, despite Mr Draghi's valiant efforts. The ECB's balance sheet has contracted further due to "passive tightening", falling by €143bn to €2.15 trillion.

The optimal moment for quantitative easing has passed. It is late in the day, even if the ECB council plucks up the courage this month to force through full-blown QE against guerrilla resistance from the Bundesbank. Yields on 10-year German Bunds have already dropped to a historic low of 0.46pc. Finland is down to 0.54pc, Holland to 0.57pc and France to 0.73. Even Spain has fallen to 1.63pc.

Little can be done by compressing yields yet further, and the ECB is prohibited by treaty law from carrying out more radical action that injects money directly into the veins of the economy. Most likely it will be another fudge, an overly complex formula that avoids any real sharing of risk. Hedge funds may pocket a profit. But it will not create many jobs in Naples.

Without such jobs, Italy's political system is going to blow up soon. Its unemployment rate has just reached a modern-era high of 13.4pc, with youth unemployment hitting a record 43.9pc.' [Continues]
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http://www.telegraph.co.uk/finance/comm ... urope.html

[Wd40]

EUR 1.1766
GBP 1.5061

[JR8]

EUR 1.1766
GBP 1.5061

What positions have you got on that you watch these rates so closely?

The Germans (er... I mean the EU) are going to be printing money soon. Everybody but the ... er, the EU already knows, accepts, and has priced this in.

My own philosophy is to back the stalwart fabled tortoise, denominated in GBP. Since my income is in GBP, and I intend to end up back in the UK, it's of little consequence to me what the currency does in the interim.

[Wd40]

I have no positions in any of those currencies. The only exposure I have is INR and SGD. The xe.com app on my phone makes it hard for me to miss these crazy moves. I just love watching these moves.

Looks like the interest has now shifted from JPY and AUD to EUR and GBP The theme is EU quantitative easing. Expect equities in EU to rally and currencies to fall.

[JR8]

The London FTSE index is alive and kicking today

IDR... can't you do better sticking it a higher yielding BSE stock or two?

[Wd40]

The London FTSE index is alive and kicking today

IDR... can't you do better sticking it a higher yielding BSE stock or two?

Yeah. Its interesting 2 opposite forces QE and Greece. If the Greek threat wasn't there European markets should have rallied even more. This month is going to be interesting. All eyes on Greece elections and the QE outlook.QE is all about bad news is good news

I am not holding IDR that is Indonesian currency. I said INR the Indian rupee

[JR8]

Oops, I see.

Yes bad news is good news; perverse eh?


'Make hay while the sun shines' as they say....

[Wd40]

http://www.bloomberg.com/news/2015-01-0 ... ncies.html

EUR expected to hit parity with USD in 2 years.

[Wd40]

http://www.bloomberg.com/news/2015-01-0 ... ncies.html

EUR expected to hit parity with USD in 2 years.