Today I feel it’s important to repeat the same things we have emphasized over the last few weeks on rates and the currency moves.

We repeat the messag4e not because we like to hear ourselves talk but because we sense that people are over thinking this one. It’s the same thing we wrote about the Euro and the Dollar two weeks ago, and it’s the same view I have expressed about oil prices relative to CB policy for months.

While we will always respect volatility and risk exposure, we think it’s time to remove some of the angst around the move in rates and currencies.

As much as people want to explain a move higher in rates and unnatural moves by the Dollar and the Euro relative to the macro and the respective CB policies, its all about positioning. Clearly positioning reflects a view that should be emanating from fundamentals, thus impossible to separate the two ultimately. But for now it’s simple: the Dollar was overbot so it got sold, The Euro was oversold so it got bought, China was overbot so it got sold, and oil was pushing around the Euro on the way down so it had to elevate it on the way up.

The move in rates is an adjustment off an artificial equilibrium that was created by plummeting oil that was created by OPEC stepping away from any discipline on supply in the face of no discipline from the US producers. Oil overshoots then corrects and drags up everything with it. EU rates plummeted well below the appropriate level ( even in a compressed hyper low yield environment that already existed).

European rates are not reacting to Greece as a credit event. I have heard a ton of noise in last 2 days about Italy being primed for EU removal….its overthinking it. It’s also wrong.

So to put some levels around currencies and ETFs: Stay short the Euro to the old range and then take profits. 1..065 to 1.075 is the next level where you should be taking off Euro shorts, and selling EU equities. At that point we will see the USD grind back down from around 97.50 to 99.00 on the DXY. Commodity currency proxies like the FXC and FXA will go lower with the Euro ( they have already moved 2% in last 4 sessions) Additionally, FXI will test back to $52.00 and will watch for breakout from there…



Italy – looks like Germany

It10yr 5-19

DE10yr 5-19

U.S. Dollar -  Found its range bottom – and reversing…not going to 110 either on this run.

DXY 5-19

China:  So much noise…meanwhile so much liquidity

FXI 5-19

Tagged with:

Leave a Reply