Thursday, February 4, 2010

Dominoes and Euro updated

Euroland crisis: I posted my target for the Euro in 2010 (1.15-1.25) back in December when the Euro was near 1.50. It seemed far fetched.

Now that we are at 1.38 2 months later, it doesn't sound quite so outlandish. Morgan Stanley was correctly bearish at the time, and now dropped their target to $1.24 from $1.32. They feel that the Euro is overvalued by 19%. An overvalued currency in the midst of a crisis. The Euro is currently oversold and could bounce at any time, but I believe we'll see 1.30-1.32 pretty soon. The Euroland crisis was discussed further last month and now, the PIIGS are in freefall and have contaminated risk taking and destroyed the US dollar carry trade.

This is in my investment outlook for 2010 (not posted) and will be part of the unravelling of the USD carry/reflation trade of 2009. Currently, I see the S&P bottoming around 990-1020 over the next few weeks before bouncing a little. The real bear action will likely take place later in spring. I believe S&P 666 is going to fall in the second half of 2010, with new highs in the US dollar index.

What does Greece have to do with the Dow? Nothing per se, but the whole world has too much debt (much of it US dollar denominated) and is long risky assets (emerging markets, commodities, stocks). Greece's coming default/restructuring hurts risk appetites and is hurting the Euro and strengthening the US dollar. Since there are too many people with US debt, the rising value of the US dollar hurts those long risky assets. They sell the assets to pay off debt. Mr. Margin doing his magic after taking 2009 off....

1 comment:

Anonymous said...

Nice post.

I am short and getting shorter on the rips (eg. added yesterday in the last five minutes). I have been long the US Dollar leading into its "contempt" phase (less than 4% bulls) and long the US 30yr since last July. Once the Loony cracks 92 (My prediction: not too long after the Olympics end), the notion that Canada is somehow immune to a housing collapse will, along with TSX 12,000 become a distant and delusional memory for a generation.

PS The G7 finance ministers meeting in Iqualuit is deliciously ironic don't you think given the chill now (re)descending over the global economy.

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