Why I?m Chasing the Euro
I?m not a person inclined to chase winning positions. Making money on one trade is certainly no guarantee that you will repeat the win on the next. Lightening doesn?t strikes twice in the same place.
Well, actually it does sometimes, especially when it comes to selling short the Currency Shares Euro Trust (FXE). Selling short the Euro (EUO) has been one of my most consistently winning trades for all of 2015.
It?s like suddenly being adopted by a generous rich uncle, a continental one that drinks espresso, eats croissants, and smokes Galois cigarettes.
Given the European Central Bank?s dramatic action weeks ago to implement an aggressive program of quantitative easing, the entire world has been trying to sell short the beleaguered continental currency.
This means running the Euro printing presses non-stop, much like the Federal Reserve started doing five years ago.You saw the results here.
Overnight Euro interest rates have already been chopped to negative numbers. Even my cleaning lady, Cecelia, knows she should be unloading her Euros.
The trouble is that the currency has already plunged 37 cents, or almost 27% since its mid 2014 top. In the currency world, this is a big move, and puts China's piddling 4.4% move in the Yuan to shame.
However, we needed an event, or an uncertainty removed, before we could go back in on the short side.
We got that yesterday with Janet's move on interest rates.
You have to go to the weekly charts to find the next support levels, but its clear that $1.00, and then $0.90 eventually beckons one.
We live in a world of chase now. All asset classes, from stocks to bonds, currencies, precious metals, oil, and even food, are at the extended end of very large one-way moves. So pickings on the trading front are becoming increasingly thin.
Think of it as buying the US stock market in 2009. I?d rather sell the (FXE) at the beginning of a five year move, than buy in the middle of a 10 year appreciation, which is what we are seeing in US stocks now.
This is also a play on the US bond market. Any fall in Treasury bond prices and rise in yields, a pretty safe bet over the medium term. This will be happening while Euro interest rates are falling, giving a huge yield advantage to the greenback.
As regular readers of this letter know, INTEREST RATES DIFFERENTIALS ARE THE LARGEST DRIVER OF CHANGES IN FOREIGN EXCHANGE RATES.
It's as simple as that.
If you need a third argument for this position, it is a bet on the continued virility of the US fracking industry.
Every additional barrel we produce in America means one less imported from the Middle East, and (as of today) $47 less sold in the foreign exchange markets.
Frackers have already cut our import bill from $400 billion to $200 billion in the past five years, prompting a staggering decline in our dollar outflows.
They are also eliminating our country?s need to maintain expensive ground forces there to protect oil supplies. Every fracking job created in the windswept planes of North Dakota means one less soldier stationed abroad.
This savings will eventually eliminate the government?s present $400 billion budget deficit.
Our newest war in the bleak sands of Syria and Iraq, fought with F-16?s, drones, and Special Forces for targeting, will cost pennies on the dollar when compared to previous conflicts.
I may not be selling short the Euro this second, today, or this week. But I will continue to smack substantial rallies. I might also pick up some Wisdom Tree Europe Hedged Equity ETF (HEDJ), which benefits mightily from a weak continental currency.
Call me old fashioned, but I like to sell high and buy low.
