Euro update

We've been following the Euro against the CAD, AUD, and USD since May 2010, where I started opening my positions.

A few weeks ago, I got driven out of the EUR/AUD position, making some sizable loss because I was sizably wrong, even though originally that position was highly profitable... Asta la vista.

On Friday, before the close, I reduced my long EUR position against the CAD and the USD, having a gut feeling that both the rise of the Euro was to fast to be sustainable, that the fall of the USD was also too dramatic given the deflation that's happening there, and that all in all, sentiment on equity has reached the exuberance required for a top.

Here are the relevant charts.

I was looking forward finding some interesting research over the week-end, and Babak over at Trader's Narrative happens to have the perfect data I needed

The charts below confirm my intuition that it's about time to get long USD again. I'm still very bearish on the AUD and the CAD, but it's time to use the USD and close down the EUR positions.

I wouldn't be surprised that the start of a correction in gold and equity markets will coincide with the bottom of the US, due any time soon now.

Short retrospective here, with the highlight points here:

• 2010-08-09 — I decided to stay long the Euro because John Taylor was forecasting a top, and I was forecasting he was wrong: Could John R. Taylor, Jr be more wrong? - take 2
• 2010-07-16 — I decided to stay long the Euro while Mish was forecasting a top. Tough call to go against Mish. I'm glad I was independent enough to make it: Euro update
• 2010-06-13 — I decided to jump on the long EUR after careful analysis done the previous weeks, and the fear that Bob Prechter was showing about the Euro. If even Prechter is scared and 'wouldn't touch it' it means you absolutely have to do it. Robert Prechter on BloombergTV's Closing Bell

Could John R. Taylor, Jr be more wrong? - take 2

Another example of John R. Taylor, Jr economic ignorance who happen to have founded and being managing the biggest Forex hedge fund in the world.

Here are a few quotes:

"Bad job report is a bad number but not so bad. It's a goldilocks for the rest of the world, so the rest of the world will be able to grow."
[...]
The $ is strengthening because Europe and Asia are growing so much more quickly than the US.
[...]
The Fed has to do more, something like QE.
[...]

I won't bother commenting these ones as they are so obviously non-sensical.

We have an advantage is that we control our currency, so we can make it go up and down, and we can do whatever. And we do. That's the reason why it's been going up lately. We're happy to have it like this, with the weak dollar.

First of all, who is "we"? It's certainly not him. Then, the Fed doesn't really control the value of the dollar, nor does the US government. The market does. So he's got it completely wrong. The Fed only controls short term interest rates. Finally, the dollar is weak, but not because "we" wanted it. The dollar is actually a lot higher than it was back when the rates at the Fed were at 4.25%, just proving him wrong: the Fed didn't manage to sink the dollar the way it wanted.

One things that worries me is that he's long the Euro and that he thinks it's going to somewhere between 1.32 and 1.35. I'm really worried now because he has almost the same target as me. As John R. Taylor has been a pretty good contrarian indicator. My target was 1.35 and 1.40. It could mean that we'll go higher than that...

Why was the dollar rising? because people who have debt in USD need to buy dollars to pay the loans which do not revolve...

Oh my... Oh my... if that were the case, you wouldn't see 15% rallies in the USD within a month or two, but during a multi-year process... The reasons why the dollar rallies are manyfold, but the three main components are:

• Dollar carry-trade unwinding
• Rushing into US treasury bonds
• Sentiment

Oh, and another scoop:

Bloomberg Anchor:  Which other European countries are going to default?

His answer: Greece and Spain

What a genius. Who could have seen that happen, a few months after it actually did happen?

I will give him some credits though: He forecasts that the "the dollar will be weak, but only for a couple of weeks". Then the dollar will strengthen into the year end. This sounds reasonable to me, and just worries me even more on my own forecasts.

This confirms that most hedge funds, like any other branch of the asset management sector is much more about marketing and sales than actual money management skills...



[2010-10-21 Update] : It seems like I was right, and that John Taylor is indeed a very good contrarian indicator:

Could John R. Taylor, Jr be more wrong?

ZeroHedge has published a report from FX Concept, by John R. Taylor Jr which I'm quoting here:


John Taylor of the world's largest currency hedge fund FX Concepts, whom we recently presented as opining that the Euro would drop to $1.20, is pretty much certain what the final outcome from the events in Europe will be: "The powerful elite political forces, and their co-opted market allies, involved in this  fanciful decision-making can not control the economic reality that will eventually destroy Greece and Europe." That's about as short and sweet as it gets.

Greece Is Out, We Just Have To Sort Out the Details
April 8, 2010
By John R. Taylor, Jr.
Chief Investment Officer
Global monetary and macro economics have become more like the literary nonsense in Alice in Wonderland. It is great fun to read, but unfortunately for all of us, we are living through this economic house of mirrors, which is more and more rapidly spinning out of control. The situation in Greece is the most poignant example at the moment. Although there do not seem to be more than 100 people in all of New York City that have any interest or concept of what is going on in Greece and within the euro, the events of the next few months will have a tremendous impact on the world. If the political actors in this tragedy-comedy play their roles well – staving off collapse – our suffering will be worse. There is no way to win. The powerful elite political forces, and their co-opted market allies, involved in this fanciful decision-making can not control the economic reality that will eventually destroy Greece and Europe. Hopefully, they will be forced to give up before the damage is too severe. The quicker the crisis comes, the better for the world, but almost everyone is working in the other direction, stretching it out to inflict maximum pain. At this point, the best way out for Greece is very clear. Greece should pull out of the euro this weekend, issue new drachma notes as soon as possible, and let the lawyers clean up the mess. If I were running Portugal, Italy, or Spain I would do the same thing – the first one out is the winner.

It's sad to read such a quote coming out of the largest currency hedge fund.

I've already mentioned it in the past, but the best solution for the Greeks is to do the exact opposite of what you've just read: stay in the Euro, default on their debt, wipe out the lenders who didn't do their homework and due diligence and start over on a sound foundation, by reducing drastically the size of the state, privatizing as much as possible, reducing taxes and getting rid of as much public servants as possible.