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UBS On The Exasperating Euro

Strategist, UBS

For foreign exchange investors there’s nothing more exasperating than the euro at the moment. Having fallen from above 1.51 against the dollar in December to below 1.19 in June, the euro has since bounced smartly back to above 1.30. Defying predictions of a Eurozone break-up or a further perilous decline to parity, the euro has instead wrong-footed many in the currency market.

Indeed, exasperation explains one of the factors behind the euro’s correction, as investors had become increasingly bearish on the currency. The belated bailout of Greece, sharp bond spread widening within the Eurozone, concerns about competitiveness, and political tensions within Europe all convinced foreign exchange participants that the euro had become a one-way bet. Hence, the euro’s summer recovery has been the clear pain trade in the currency markets, forcing investors to close their shorts.

The reversal in the exchange rate has been driven by stronger data in the Eurozone and renewed concerns about the health of the US economy. In particular Germany’s super-competitive exporters have benefited from the slide in the euro in the first half of the year. An excellent reflection of this is the continuing strength of the Swiss franc. As Switzerland sends 20% of its exports to Germany, the franc is a proxy for the largest economy in Europe. In many ways it is a substitute for the old German mark.

In contrast, the dollar has fallen this summer as weaker US growth has forced Federal Reserve officials to consider resuming quantitative easing. As last year’s inventory bounce has begun to wear off, structural concerns about the health of the US housing and labour markets have come to the fore again.

In the near term the euro is likely to keep its gains; there are still shorts in the market and fears about the Fed will keep the dollar on the back-foot. But the longer-term picture remains bearish. The structural problems of high debts, low growth and diverging current account imbalances remain stubbornly high. Fiscal austerity will undermine Eurozone growth this year and next. The European Central Bank won’t be in a position to raise interest rates until well into 2011, at the earliest.

What are the risks to our long-term bearish euro view? The major concern of course is the Fed resuming asset purchases in order to expand US money supply. This would undermine the dollar as it did in March 2009 when the Fed started a year-long programme of buying Treasuries and mortgage-backed securities. The other concern is that the consensus among foreign exchange participants remains bearish on the euro. As a result, their positioning would keep the markets vulnerable to further exasperating rallies in the currency.

Mystery Trader Revealed…And His Name Is 'Hope'

The UK’s Daily Mirror newspaper has uncovered the FX trader who dropped over $300k in a Scouse club. It is a 23-year old ‘self-taught’ barrow-boy named (somewhat ironically in our view) Alex Hope. Self-described as “talented (three years in and a six-figure salary, hhmm), charismatic (its amazing how much ‘charisma’ a GBP125k bottle of bubbly will buy), and thoroughly likeable (ditto) man. Alex Hope exudes knowledge…” and is willing to share it with you according to his website. How did he become this B.S.D. of the FX markets? “I took two months off my job at Wembley, got really obsessed with reading charts and got the guts to start trading properly.” This self-made rosy-cheeked young man with a penchant for mind-numbingly-arrogant-looking photos on his website may have just become the poster boy for all that is ‘great’ about the free market – or perhaps a skim through his blog and media exposure will reassure us all that anything is possible as we note he does have some good taste (not just in Champagne) in RTing our posts on Twitter.

 We can only HOPE that the next time he decides to go down the rub-a-dub-dub for a Leo Sayer, maybe he’ll take some of us Septic Tanks with him on the frog-and-toad…as the days of the ship-it-in-large-on-the-left John, done-a-yard by-breakfast spot FX trader are clearly back with us.

 
And here is his Bio, enjoy:
 

 London born and bred, Alex Hope, 22, is a self-taught trader who specialises in the Foreign Exchange Market. Despite his tender years, Alex is a name to watch out for in the city; an expert in the UK economy, he works the currency markets, regularly trading millions.  (more…)

German Economics Minister Confirms Fed Manipulates The FX Market

The German Economics Minister Rainer Bruederle has just confirmed precisely what many have known and said for years, namely that the US Federal Reserve is active in the secondary markets, in this particular case in FX. While not so much of a secret for some of the fringe players such as a the SNB, BOE and BOJ, the Fed has never had a formal statement on currency intervention, as, of course, it would have been seen as a sign of weakness (and allegedly could be considered an unconstitutional activity). And why would anybody dream of manipulating the world’s strongest currency. Of course, if Bernanke manipulates currencies, as has now been confirmed, it is more than clear that he directly buys and sells stocks in the secondary market, and/or Treasuries in the primary. We wonder what other juicy disclosure Bernanke’s trans-Atlantic CB colleagues will announce once they are cornered about their recent market manipulative conduct.

From Dow Jones:

The U.S. Federal Reserve is also active in currency markets, German Economics Minister Rainer Bruederle said Friday.

His comments come on the heels of remarks made by his Swiss counterpart who said that the Swiss National Bank purchased euros to buttress the single currency.

“It is a regular procedure of central banks,” to intervene in currency markets, Bruederle said. “It is not a secret,” that central banks have a foreign exchange rate target, he added.

Bruederle said “eruptive” movements have to be avoided. He previously said that China holds 25 percent of its foreign exchange reserves in euros.

 

Soros Says "Crisis Far From Over, We Have Just Entered Act 2"

The bearish case has just gotten another notable supporter in the face of George Soros, who during his remarks at a conference in Vienna, said that the “we have only just entered Act II” of the global financial crisis.

Bloomberg reports:

Billionaire investor George Soros said “we have just entered Act II” of the crisis as Europe’s fiscal woes worsen.

“The collapse of the financial system as we know it is real, and the crisis is far from over,” Soros said today at a conference in Vienna. “Indeed, we have just entered Act II of the drama.”

Concern that Europe’s sovereign-debt crisis may spread sent the euro to a four-year low against the dollar on June 7 and has wiped out more than $4 trillion from global stock markets this year. Europe’s debt-ridden nations have to raise almost 2 trillion euros ($2.4 trillion) within the next three years to refinance maturing bonds and fund deficits, according to Bank of America Corp.

“When the financial markets started losing confidence in the credibility of sovereign debt, Greece and the euro have taken center stage, but the effects are liable to be felt worldwide,” Soros said.

One wonders if Soros, who made a name for himself originally in the currency markets, is involved in the current record FX volatility. Of course, with animosity toward “speculators” at unprecedented levels, it probably would not be very prudent of anyone to disclose they are now taking on Central Banks directly.

How Leeson broke the bank -Must read

It was the 1980s. Traders were young and greed was good. Nick Leeson, a working class lad from Watford, the son of a plasterer, was chuffed to land a job in the purportedly-glamorous world of the City of London in 1982.It was a relatively low-grade job, but he quickly made a name for himself. He worked his way up, becoming a whiz-kid in the hardworking atmosphere of the far eastern currency markets.
Soon, he was Barings Bank’s star Singapore trader, bringing substantial profits from the Singapore International Monetary Exchange. By 1993, a year after his arrival in Asia, Leeson had made more than £10m – about 10% of Barings’s total profit for that year.In his autobiography Rogue Trader, Leeson said the ethos at Barings was simple: “We were all driven to make profits, profits, and more profits … I was the rising star.”He and his wife Lisa enjoyed a life of luxury that the money brought.
He earned a bonus of £130,000 on his salary of £50,000
Nickleeson
Nicholas Leesson ,the trader who brought down the Barings Bankbarings_bank_logo in Februrary ,1995 ,is a made to order example of the business of not facing up to a loss ad getting out.He’s also a perfect example of the dangers of adding to a losing postioin in hopes of digging your way out.The Barings Bank was the bank that lent the United States the money to make the Louisiana Purchase.When Nicholas Lesson finished his trading for the bank ,Barings was sold for the equivalent of $ 1.40. (more…)