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The FX market is bewitched and besotted by the euro. Strangely enough, “old Europe” managed to come up with an innovative experiment, a stateless state and a currency without a Treasury, and while it is facing serious problems because of the lack of an official transfer mechanism, somehow managing to convince traders that it deserves respect. For our Currency Trader Magazine column (out Aug 1 and free, by the way), we wrote that being enamored of the euro is not the same thing as having a dollar-negative bias (which also exists in its own right). From the euro bottom in 2000, the euro has been under its 200-day moving average only about 30% of the time. We’d call that a persistent pro-euro bias.
Major figures, including Larry Summers and Milton Friedman, predicted from the beginning that the first big financial crisis would drive a stake through the heart of the eurozone and cause it to break up. But aside from France, all the legacy currencies were burned to ashes and the commitment to the eurozone experiment is absolute, among governments if not among a majority of citizens all the time and everywhere. The resolve is remarkable and so is the courage of leaders to take the hard decisions. Yes, a lot of it is weaselly and muddling through, but never mind—they got there in the end. And we would like the grand historic gesture better if the leaders were a little more humble about it.
Therefore, while the euro may dip and even as far as 1.3770 (support on the weekly chart), we can easily see a return to the Nov 30, 2009 high at 1.5141 before the end of August. When the market is in love, you have to get out of the way.
But remember that the fix is for Greece only and Greece has to deliver the goods, something that most analysts doubt it can or will do. If Greece fails to raise tax revenues and cut spending according to plan, in a year or two there will be another crisis. Others have to keep their socks pulled up, too—Ireland, Portugal, Spain and Italy. The grand gesture is grand indeed but gestures don’t pay the bills or the bondholders.
Now it’s on to a more penetrating global examination of the shocking and disgraceful behavior in Washington. The debt ceiling has been raised many times before, but mostly behind closed doors. Now the leaders admit it would be a catastrophe not to raise the ceiling but in practice, it’s all about the next presidential election, not the welfare of the country, its citizens and its reputation. There are (almost) no circumstances under which we can imagine dollar firmness in the face of this nonsense. It’s not inconceivable that a terrorist attack or some other disaster could revive the dollar’s safe-haven status, but otherwise the dollar is toast, and deserves to be.
SPOTCURRENT POSITIONSIGNAL STRENGHTOPEN DATEOPEN RATEPOSITION GAIN/LOSS USD/JPY78.23SHORT USDWEAK06/29/1179.040.65% GBP/USD1.6290LONG GBPNEW*STRONG06/17/111.62900.00% EURO/USD1.4400SHORT EUROWEAK06/17/111.4220-1.27% EURO/JPY113.06SHORT EUROWEAK07/05/11111.23-1.65% EUR/GBP0.8838SHORT EUROWEAK07/12/110.8800-0.43% GBP/JPY127.93SHORT GBPSTRONG06/13/11130.742.15% USD/CHF0.8219SHORT USDSTRONG05/27/110.85754.33% USD/CAD0.9443SHORT USDWEAK06/29/110.96602.30% AUD/USD1.0842LONG AUDWEAK07/08/111.07880.50% AUD/JPY85.14SHORT AUDSTRONG07/13/1184.65-0.58% USD/MXN11.5897SHORT USDWEAK06/29/1111.74271.32%
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