Recalibrating the Valuations – EUR and JPY

There is nothing like a burst of spring rain to cleanse the day. We have been getting some of those lately and there is nothing I like more than the smell of early rain. You know, the smell of moisture in the air,  wafting into your nostrils with a light breeze. Then of course, the rain starts and before long, everything starts to smell like wet dog.

Spring rain

That is how I would describe the markets last week. Stale, stalemate or just wet dog.

We had massive bad news, downgrades, elections everywhere that are looking precarious for the incumbents, incessant easings out of all central banks, and disappointing economic data everyday out of Europe (especially Spain).

Yet there was nothing disappointing about the markets.

EURUSD at a 3 week high; USDJPY at 5 week low; SPX at a 3 week high; GOLD at a 2 week high; Jun 10Y Note Future hit its contract high; and so forth.

All my wet blanket trades have become wet dogs. And my counter intuitive trading still works. What a zero sum game it has been.

Its time for some recalibration of the 2 trades.


I pick Soros for EUR/USD.  He has spoken quite a bit this month.

11 April FT Europe’s Future Is Not Up To The Bundesbank “Whether or not the euro endures, Europe is facing a long period of economic stagnation or worse. ”

15 April Zerohedge : Soros On Europe : Iceberg Dead Ahead, on video.

26 April WSJ : Soros Compares Euro-Zone Crisis to Soviet Collapse.

Europe has great assets – great brand name companies, grand old real estate and great capacity for agriculture. China knows.

Some say the crisis is over because Paulson has started to short European bonds and buying European sovereign CDS. – 17 Apr, Zerohedge.

The other theory is that we have massive repatriation into Europe from European banks selling offshore assets to buy their own sovereign bonds as well as the IMF converting their new war chest into EUR for use in the near future. Plausible, given that the 2 largest Spanish banks, Banco Santander and BBVA, have run out of credit for their own government.

A Crucial Link In The Sovereign Debt Cycle Keeping Spain Alive Is Breaking by @SimoneFoxman

Others, like me, tend to believe that “The Financial System Is Increasingly Being Rigged” – HSBC Stephen King. And that is echoed in Feb by Nomura’s Bob Janguah who said “Markets are so rigged by policy makers that I have no meaningful insights to offer.”

What about options ?

Yes. It does look like everyone in the sane world would be long EUR/USD put options into the French and Greek elections at least. When the market is long puts, gamma hedging would tend to be in the opposite direction. That is an angle certainly unexplored.

Recalibrating the EUR/USD

I still stick to a downside call. When the options have expired and there is no more shit to come, the realization is that most of the European economies have  painful structural adjustments to be made to their mostly social welfare states. Political instability and free loaders will continue to eat into the generous German surpluses and it will be a matter of time before more want in on the free Greek lunch.

Unions are for the good times and consortiums never last. As I write, borders are closing down as Sarkozy has promised. And I daresay, in 5 years, some parts of Europe may become just another Chinese province.

PS : New Stiglitz piece


For Japan, I pick Doug Kass who was interviewed by the Harvard Business School, mentioned in this Business Insider article. (of course he is bearish EUR too)


Hayman Capital Management

by Robin GreenwoodJulie MessinaJared Dourdeville
Source: Harvard Business School
28 pages.  Publication date: Mar 27, 2012. Prod. #: 212091-PDF-ENG

In late December 2011, Hayman Capital founder and portfolio manager Kyle Bass was reviewing Japanese government budget projections for 2012. The projections appeared contrary to Hayman Capital’s views on Japan, where the fund had built a bearish position. Japan had the world’s highest debt burden, whether expressed as a percentage of GDP or government revenue. Guided by recent global events, Bass forecast that Japan would soon experience increases in interest rates, a devaluation of the currency, and, eventually, a restructuring of the country’s debt.

Daily chart: For years, Japan was Asia’s richest and most powerful economy. Now, Japan is steadily being overtaken THE ECONOMIST

Strangely, all that IMF contribution of 60 bio did not help USD/JPY one bit.

Again, a case of market positioning in a lazy trade, as described by a strategist friend. Gamma vs market positioning into the BOJ last Friday.

Recalibrating the USD/JPY

>200% Debt/GDP, and only saved by their fast eroding savings of the aged ?

Lets give them just a bit of time. But I see 83 then 88 and then ?

What About The USD

EURUSD and USDJPY. It is only relative to the USD.

Is it such a big question mark after the FOMC and hearing everything that seems to have pleased the bulls and bears ?

A hike in 2014, more QE promised if things go bad. But things are not going that badly except that the Citi Surprise Index is in negative territory now, which means negative news will hurt.

Its all up to next week now for the USD.

Presenting List of Next Week’s Market Moving Events

ECB on Thurs, NFP Fri , French and Greek Elections on Sunday.

More noise. The recalibration is done for me.

Royalty Free Stock Image: Accuracy calibrate