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Currency Analysis Damien Cleusix Mar 2011

Currency Analysis Damien Cleusix Mar 2011

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Published by: TradersNarrative on Apr 07, 2011
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08/28/2011

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o a ac casse oca on
GTAA
Currencies
 
March 23
rd 
, 2011
Damien Cleusix
Clue6 Second Quarter 2011
am en c ue .com
 
1
Executive Summary
Currencies
The USD is becoming increasingly undervalued against most currencies. It is at a 40 years low on a real broad trade-wei hted basis.
Its econom is much more d namic and has started to rebalance earlier than other develo ed economies.
 
Companies have been cutting costs aggressively and are much more competitive in the international markets.The
big problem remains that the Fed
is suppressing real government bond yields through
quantitative easing
. Ceterisparibus,
the USD will have to be more undervalued on a PPP basis to be in equilibrium. Indeed, the deficit of interestspayment foreigners are receiving has to be compensated by a lower price I.e. lower USD
(this is another reason whyemerging markets with negative real yields have very undervalued currencies on a PPP basis). At current levels we think thecompensation is large enough.
e ec n ng s pus ng o er en ra an s reasur es o ecome ncreas ng y aggress ve uyer o o wea entheir own currencies
. They then have to recycle their newly acquired USD and in so doing are exerting a downward pressureon real rates in the US and thus weakening the USD. This can not last forever. This will end by a radical redesign of our currentmonetary system and the sooner the better. The winner… Gold.
Sentiment is increasingly supportive for the USD
. Speculators had their biggest USD net short position ever a week ago andhave covered a third despite continued USD weakness (a positive divergence. Assets in the the Rydex Weakening Dollar havesurpassed assets in the Rydex Strengthening Dollar fund but have yet to spike briefly higher as they usually do when the USDdecline exhausts itself.There is a
big global short USD position which is growing by the day as the increase in foreign central bank reserves cannot be completely explained by their current account balance and the net foreign direct investments
. Hot money is flowingto emerging markets and we are on the look out for canaries…
Clue6 Second Quarter 2011
Anew “Homeland Investment Act” could be voted in the month to come which could offer some support for the USD as it did
 
2
Executive Summary
at the end of 2004, while oil price rising further might reach a level where its historical highly negative correlation with the USDturns positive as it does when oil price rise enough to break the back of the macro up cycle.
-
-
,
more if you are Greek). Yields spreads remain favorable and in synch (which is even more important) but the spread momentumhas been faltering in the past 2 weeks despite M. Trichet
"strong vigilance".Sentiment is not supportive with Speculators having accumulated a large net long position and a short-term positive risk reversal divergence
.
The Euro has been supported by the strong growth in emerging markets and the rapid inflows of hot money
. Indeedexports to emerging markets are contributing strongly to the recent performance of the European core area and Emergingentra an s are usy re a anc ng t e r currency o ng towar greater vers cat on even t ey not t ey wou ave tosell some USD to keep the mix stable). We should also remember that a big chunk of emerging markets credit expansion is andhas been financed by European banks. So
if emerging markets slow down is larger than most expect (our scenario) Europeand the Euro are likely to suffer much more than the US and its currency.
The
trend is up
but extended. We would exit long positions at least until we get an upside break. We would sell 1.5-3% OTMcalls with 1-3 months maturity and would start to build an outright short position on a move below 1.39 and increase it if itmoves below 1.375. We would use an initial stop at the high the Euro will make before it move below our trigger zone (so not1.4248 but higher or lower depending where the current intraday rebounds stop).
Longer-term we maintain that the Euro could fall below 1
. We think that it will bottom near 0.7 if it survives. Crazy? We metthe same skepticism when we forecasted a rise above 1.5 when the ECB started to intervene when it was hovering near 0.85almost 10 years ago. While supportive political decisions might be taken in the near future (but it seems they won't as is usual) ,
Clue6 Second Quarter 2011
e pro ems won sappear an w come ac a er o un em.
e sys em, o po ca an nanc a as o ereformed but we will probably need a new crisis.

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