Watch the euro.
Yesterday while stocks in Europe and around the world rallied in relief on news of a $146 billion bailout for Greece, a falling euro signaled continued skepticism that the crisis was over.
That skepticism seems to be on the rise this morning. As of 9:00 a.m. in New York the euro had fallen $1.3064 against the U.S. dollar. That’s down from $1.3207 in New York yesterday and marks the lowest price for the euro in more than a year.
The decision by the European Central Bank to continue to accept Greek government bonds as collateral for bank loans even though they are now rated below investment grade—or more popularly called junk—seems to be weighing particularly heavily on the currency markets.
From the point of view of currency traders—and holders of euros in general—now that European Union politicians have abandoned what few shreds of fiscal credibility they had in a bailout deal that no one believes has really solved the euro zone’s debt problem, the European Central Bank is the last line of defense. Anything that the bank does to weaken its standards—such as accepting junk bonds as collateral—undermines belief in that line of defense just a little bit more.
The euro will be in for another round of selling if the bank comes to be seen not as the heir to the hard-nosed inflation fighting Deutsche Bank but as just another central bank willing to sacrifice long-term policy to the politics of the moment.
Jim, The Euro is in trouble because of Greek Debt problems. Greece is only a couple percent of the total GDP of the Union. And now we are worried that they will take Greek junk as collateral for a bailout. How is that any different from the US taking dead mortgages for collateral on bank bailouts. Also has US debt problems disappeared, now that we are a safe haven for money?
The markets are also spooked because they are feeling deja vu of the run up to the Bear Stearns fiasco and the collapse of the world markets. They still remember the pain from that disaster. Some may also remember 9/16/92 when George Soros broke the pound sterling and made 1 billion US $ by shorting sterling. I can’t help wondering who is behind the scenes puting pressure on the system so they can reap a billion or two this time. There is almost certainly some genius or two out there with high speed computers, math wizards and software trying to pull off some high leverage scheme to make a billion or two on these problems. Hey Jim, what do you think their strategy is this time?
upickem,
You can’t legally “reduce volatility” without shutting down the trade completely (even if it is only temporary).
Hypothetical: Let’s say you put a cap on your currency’s movement by 10%. Let’s say it drops 10% in a few hours. What then? Do you say it can’t be traded for less than that 10% reduced price?
Now let’s say you’re a trader in another currency. Are you going to trade your currency for a 10% devalued currency, when you aren’t sure whether it is worth 10% less, or even less than that? If you did, you wouldn’t be trading, you’d be speculating that the currency was worth more than that 10% reduction.
My point is you can’t put a limit on currency trades like that UNLESS you peg your currency to another currency (see China for example). But as we’ve seen with China, even if you remove the currency volatility, you don’t remove other potential economic problems, like inflation.
EdMcGon…I did not say shut it off. I said reduce the volatility to take the gambling and disrupting of lives out of it so you have a smoother market like the food commodities markets.
upickem,
The problem with your idea is this: If you say that suddenly no one can buy or sell a currency, guess what happens to that country’s international trading? Shut off. No exporting or importing.
You can’t treat currencies like equities.
They should put trading limits on currencies so they can’t change so much which would help stabilize them and minimize the effects of “news”. Free floating currencies cause volatility which creates a gambling atmosphere and disrupts lives.
Off topic, if you haven’t already done so, you might want to take a look at inverse ETF’s.
I must admit, I took a long look at EUO (the euro short) this morning.
The ONLY solution for the ECB is to inflate the euro, but Germany will throw a fit if they attempt it. This leaves the ECB with the “death by a thousand cuts” (or is that death by a thousand bonds?) approach.
Jim, a short time ago you wrote about having a plan to get out. I was curious as to what you will do with Jubak’s Picks? What percentage of cash do you think you will put to Jubak’s Picks if any at all. I think you have about 10% cash right now? Thanks for keeping us informed!!