Notes From Underground: Unwinding the EURO CROSSES (Is the SNB Paying Attention?)

Friday saw a continuation of the EURO RALLY as the most despised currency was the subject of massive short covering. For months many analysts have been opining that the EURO was heads to PAR with the DOLLAR. The trade looked promising as 2011 came to a close but in 2012 the EURO has rallied against the DOLLAR. Until last week, the EURO had weakened on many of the CROSSES but even those began to significantly correct as the EURO rally against the DOLLAR continued. The action on Friday saw the EURO rally against all currencies except the SWISS FRANC as that cross hovers near the SNB‘s line in the sand level of 120 EUR/CHF. Late in New York, the EUR/CHF closed at 120.48 so the Swiss National Bank has to be concerned that traders are going to challenge the veracity of the SNB’S SWISS FRANC POLICY.

NOTES FROM UNDERGROUND has consistently warned policy makers not to challenge the markets unless they have the needed tools to take on investors. If the SNB has a plan to maintain the 120 EUR/CHF it had better be loading the monetary guns and be readying for battle. The impetus for the EURO RALLY is to be found in a piece from BLOOMBERG (Matt Brockett and Jeff Black) proposing that February 29’s 3-YEAR LTRO may well only be about 470 BILLION EUROS, which is less than the previous tranche in December. The lower LTRO forced the SHORTS to cover as the ECB would fail to create the massive amount of LIQUIDITY that the market was anticipating.

It seems that Wednesday’s LTRO announcement was noted as important but if the ECB/DRAGHI return to a higher level of LTRO800 BILLION-PLUS–then the EURO will be sold off as the shorts have been forced out. Acting to create even more uncertainty for the ECB is the battle that took place this weekend at the G-20 meeting in Mexico. Many members of the G-20 were reticent to meet an IMF call for more funding until Europe antes up more of its own funds. It was reported that U.S. Treasury Secretary Geithner was challenging GERMAN FINANCE MINISTER Schaeuble to adhere to a larger EURO-based backstop for the ECB before the IMF adds any more funds from its members.

The Chinese, Japanese, Brazil and others want to see Germany increase its contribution to the ECB and Euro Stability Mechanism. Schaeuble and Merkel would like to utilize the IMF‘s credit facility to enhance the EUROPEAN BAILOUT. It seems like the Germans have learned from the financial locusts about the use of OPM (other people’s money). Again, my proposal is a change in the IMF rules and allow for the FUND to LEVERAGE ITS GOLD THROUGH THE USE OF GOLD-BACKED BONDS. I WONDER IF THE CHINESE WOULD BE MORE AMENABLE TO A LARGE LOAN TO THE IMF IF IT WAS BACKED BY THE WORLD’S GOLD? Interesting that Sarkozy has been missing from the IMF/German/G-20 conversation for IMF DIRECTOR LAGARDE IS SARKOZY’S ACE IN THE INTERNATIONAL FINANCING HOLE.

***A very good piece in BARRON’S over the weekend by one of the best thinkers in the GLOBAL MACRO realm. There is an interview with Jeremy Grantham who has been so correct on many of the most significant global forecasts over the last 30 years. As a trader it may be difficult to use his analysis on a short-term basis, but it is always wise to pay attention to his analysis if not his time line. One of the key points he notes is similar to a theme of NOTES:


Further on in a question about the BONDS being a bubble Grantham opines that, “Every bubble in our book has been driven by euphoria and the thing about the long bond is, it’s driven by the FED and by nervousness. Why buy a long government bond at terrible rates? They are dangerously overpriced.”

If Grantham is correct, and my readers know that I have thought the FED has broken the SIGNIFICANCE of the BOND MARKET’S ability to predict through its massive QE programs. Many analysts and traders have lost much money during the last 18 months by selling BONDS on obvious fundamentals radiating from the QE programs, but the FUNDAMENTALS HAVE BEEN MISSED TIME AS THE TECHNICALS HAVE AS YET NOT ALIGNED.

It seems that if  the BONDS are to be sold–at present value the 5-YEAR TREASURY AT 90 BASIS POINTS is ridiculously overbought–yes, the 10-YEAR NOTE at 2% is also crazy–but with the FED TWISTING THE NIGHT AWAY the FIVE MAY BE THE MOST VULNERABLE and ITS DURATION ALSO FALLS BEYOND THE EXTENDED PERIOD LANGUAGE OF THE FOMC. As always, do the your TECHNICALS but it seems from the FUNDAMENTALS THE 5-YEAR NOTE IS THE MOST VULNERABLE, especially from a BOND buyers viewpoint it has the least room for capital appreciation.

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2 Responses to “Notes From Underground: Unwinding the EURO CROSSES (Is the SNB Paying Attention?)”

  1. Kevin Says:

    I think it was Hugh Hendry who called shorting the 10 year Treasury “peaking at the last chapter of a thick novel”. His point was the route to inflation or even hyper inflation has to pass through deflation first. That is what would scare policy makers enough to abadon their last vestiges of caution and just print in ever increasing volumes.

    The massive fiscal drag looming in 2013 for developed markets from Spain, Italy, France, Germany, and, make no mistake, the US, mean the risks of deflation and recession will soon be back, front and centre.

    I know I couldn’t hold fundamentally-driven bond shorts through this process – and hence agree that when trading big, pivotal trend changes we can afford to wait for all the stars to align before jumping in – importantly including, as you said, technicals.

    The only comfort one can take when yields get so low, is that our maximum losses on shorts remain “mathematically” capped close to the zero YTM. Of course if banks once again become so reviled that short-dated treasuries trade on a negative yield then perhaps even this comfort is illusionary??

  2. yra Says:

    Kevin–another solid post .I agree which is why the focus is directed at the 5 year where the possible gain has to be much less then the 10 or 30 and if the FED extends the period of low rates again because of what Hendry fears —well then the 5/30 flattenr should be a big winner

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