The EUR in 2017


In the last two days of 2016, the EUR attempted to break down below the 1.015 -1.0350 support zone and then late in the day proceeded to spike briefly over 1.0650 to end the year at 1.0527. This zone of support is important if you have a look at very LT charts (next chart below). A close under this level particularly if it occurs on a weekly basis would suggest another leg down to .9550-9650.  There is little support around 1.00 so a close below the support zone should  it occur  would result in a faster or more impulsive  leg down and coincide with  a pickup in short term volatility.  Generally the FX market is expecting a stronger dollar in 2017, but the range of outcomes is wide given the new levels of uncertainty posed by Trump,  Brexit,  and forthcoming European elections. A safe assumption about 2017 is that volatility in the EUR and CHF will pick up following two years of broad consolidative price action. If you have to weigh the uncertainty posed by the elections in Europe vs. the uncertainty of the Trump’s fiscal plans, the European situation will, in my view, weigh much more heavily on the short term price action. Longer term Trump’s Dollar policies will come into better focus. The new administrations fiscal policies may well be dollar supportive in the near term,  but that may well change quickly if protectionist policies are favored and we end up in a new currency 'cold war'. 



 EUR - Daily (Data prior to 1999 is synthesized from the D-mark)
Add caption
The last leg lower in the EUR from levels just over 1.2200 was a break out from the triangle formation going back to 2010 and so far the break in the triangle has only so far produced a move to the lows at 1.0350 area of support.  If you believe break outs from triangles suggest a move equal to the width of the triangle then the implication is that the EUR can move back to its all time lows under 90 cents. While many may find this an interesting observation or rule of thumb,  it is less useful as a trading tool. What is significant is that breakouts from these kinds of chart patterns are important and often are observed at major inflection points that can persist for many months and even years.  We are still in a Dollar bull market that now looks to be entering a new and perhaps final phase with the recent break of the consolidation pattern.  









Above is the price action of the EUR from its launch in 1999. As you can see it was at the end of 1999 that the EUR found support around 1.0150-1.0350. This support level proved difficult to crack until it finally gave way in 2000.




As you can see in the chart  above the EUR started the year around 1.0300 and finally traded through par and then fell to .9745 in the space of three days. Par then became top side resistance and when it failed to break over that level it once again quickly fell, within a week, to .9500. As volatility rises in 2017 we should see both medium term trend following and short term  counter-trend strategies start to perform. Both of these strategies generally have under performed during long periods of consolidation and range trading, but as volatility rise they should start to deliver with greater consistency. 
And on the upside, when the long term Dollar trend changed, the EUR once again found resistance at par, and getting thru the 1.0150-1.0350 zone proved difficult, but once it had cleared the long term EUR uptrend was able to resume. The period of consolidation prior to the break out was from approx July 02 - Dec 02, or roughly six months. 

What is surprising is that the dollar is not already much stronger. US-German interest rate spreads are at new all time highs. In France, Italy, and the Netherlands a number of  political parties are either hostile to the EU and the single currency or openly calling for its break up. The chart above illustrates, in another way the resilience of the EUR in the face of these pressures. In spite of LT momentum making a new cyclical lows the EUR continued its consolidation pattern from 2015 well into 2016. Momentum pressures declined returning nearly to flat and only recently now turning lower.  The 1.0150-1.0350 support zone has remained a tough area to break but once that barrier is overcome the downside momentum should accelerate quickly and the EUR should  remain under pressure in the lead up to the European elections.

James




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yassa
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January 4, 2017 at 10:58 PM ×

Very pleased to see that this blog is continuing despite MM's sad departure.

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yassa
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January 4, 2017 at 10:59 PM ×

"sad departure" sounds a bit darker than intended!

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Polemic
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January 5, 2017 at 12:22 AM ×

James. Welcome..

I think that post could have been condensed somewhat and I am still unclear as to what you are saying. Or rather what you are saying the trade is. So.. what's the trade?

I do have a real problem with the idea that 16year old inflection price points are still relevant as the macro factors that drove them then are long dead.

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abee crombie
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January 5, 2017 at 2:29 AM ×

Nice post james. A test of Euro pariry with the dollat seems like the most obvious path for the markets. I wonder if the pound gets there as well.

But like Pol hinted, i am not sure trading it will be so easy. I can remember 2011/2012 and 2013 where many a macro punter go whipsawed big time shorting the euro.

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koolbong
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January 5, 2017 at 3:18 AM ×

nicely done Abee / James... great to see the blog carrying on... good luck guys!...
and while dealing with the fairly demanding comments section do remember the most important thing about this blog... 'satisfaction guaranteed or your money back!'

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John T
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January 5, 2017 at 9:22 AM ×

Good to see the comments section thriving, and interesting to see many ex-financial sector types posting here. I must say however that I'm bemused at how many here are trying to call a top in equity markets (that are being clearly supported) or even short sell them. Maybe that's why so many here are EX-financial sector ;)

Good luck for 2017, and try not to donate all your savings to the markets just yet, we've still got over 11 months to go!

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Anonymous
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January 5, 2017 at 9:27 AM ×

who outside of nico is calling a top ? i know pol dipped his toe in but like everyone its with no conviction

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amplitudeinthehouse
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January 5, 2017 at 10:09 AM ×

Johnny T @ 9:22

"(that are being clearly supported)"

You know why, Johnny, b/c you know you won't ever get sweet f##k all from me!

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Polemic
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January 5, 2017 at 10:34 AM ×

Toe dipped indeed. though it's more like foot dipped and at times I feel I m up to my knees. I have stops not far above so won't be amputation type pain if I'm wrong despite the taunting from the cheap seats. Its an odds play. I think there is more chance of eqs falling from here than going up and have geared the stop t/p profit mentally as 10/1. But of course when things move you have to reassess why they have moved and smell the reaction.

No doubt IF things move down they will all be branded a correction and be bought anyway. Only once things are branded a bear market with all the old worries being cited would I buy back. Its really simple. When everyone screams doom you buy and when every one screams buy .. you sell. the scream-o-meter is at 100db and you have Macro guys now willing to mortgage the kids on this move as they have been so desperate for THE trade to arrive.

So considering how absolutely convinced everyone is that this IS the trade. I naturally assume that they are all in it and their money is already in the price.

Now of course it's all very exciting to be buying new highs calling for 'the big one' but I have found it much more exciting buying the lows and being here now.

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Rossco
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January 5, 2017 at 11:12 AM ×

so.... $/Y moves 2.5% high to low in 24 hours and spoos move 10 bps. interesting .

what are the chances of VIX putting in a reversal and a very low volume but violent rip higher ?

wouldn't bet against it

ps. appreciate the new teams efforts

pps Nico, hang ten here man, enjoy reading your stuff

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S Rafferty
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January 5, 2017 at 11:12 AM ×

James, that is well and good, and with no surprises you may be right to only focus on the downside levels of the Eur (conversely the upside of the dollar).

All the usual bricks are there in the wall of worry and the market is at that brave stage where they are simply ignored or factored in by the risk parity guys.
One brick that I do not hear much about is the Middle East, and that has me sceptical. If a shitstorm were to erupt there (and a high probability it would involve Saudi), it could turn the "dollar trade" on its head.

That's what I'm keeping a close eye on anyhow.

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Laughing Man
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January 5, 2017 at 11:19 AM ×

tbh the noise from the 'this can't go higher' is not so small and positioning (seen from asia) is not full risk-on, far from it. While I tend to side with the 'more downside than upside' crowd, my conviction level is v. low.

A few things that stand out on my side are 1/ some vols are cheap and under realized and 2/ implied dividends rallied hard into eoy and seem to stabilize there.
The latter is an interesting signal considering it's small market of mostly professionals. I can't reconcile this with the not so risk-on positioning I see elsewhere.

PS: old time lurker and very occasional anonymous poster previously. I finally created an account I could post with although timing was less than ideal as MM just left!

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Polemic
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January 5, 2017 at 11:24 AM ×

Thanks LM. I need that balance. I m obviously in the wrong music hall where the tune I hear is different to the one you are getting.
Oh well. it's just a punt.

I like the idea of Viol popping higher too so yes .. perhaps 2 month puts are the way. I might look at Dax puts as if everything reverses then EURUSD goes up too hitting Euro stocks and no doubt someone will drag euro woe to of the cupboard.

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ItSucks2BShort
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January 5, 2017 at 12:08 PM ×

Headline this morning:

Global Stocks Rise To 1.5 Year High After Chinese Intervention Halts Dollar Rally

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IPA
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January 5, 2017 at 12:13 PM ×

Pol,

I am buying May/Jun equity puts. Stuff is cheap. It ain't going to be a two-week affair and I hate time decay to even be remotely bothering me, bad enough pissing against the wind is involved. When the crap hits the fan I'll be sitting and waiting for them. VIX north of 30 gets me out.

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CV
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January 5, 2017 at 2:50 PM ×

Nice post James. Good to see you, Abee etc rallying to keep this little cesspool alive ;). I am in two minds on the euro to be honest. It's very tough going for the shorts down here given where we are coming from, but the macro environment suggests that parity is a shoe-in

- EU/EZ political clusterf'ck
- Wider rate differentials with the U.S.
- Trump policy mix hugely bullish for the USD

The only thing is really that if we assume the EUR is a carry funder, which it is to some extent, the money will come home if the sh't hits the fan, which means the euro goes up. And, lest I forget, LB's point that there is no way the US is as strong as we think and therefore that the Fed will be stuck in neutral in contrast to markets' expectation of several hikes.

Not an easy one!

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Anonymous
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January 5, 2017 at 2:58 PM ×

polemic @11.24

This is not an easy market, but isn't there the danger that a weaker € helps European exports and thus keeps a bid to European equities? Something similar to what has been seen in UK markets? I appreciate there are several factors to consider.

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checkmate
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January 5, 2017 at 3:20 PM ×

I don't buy into the economy 'isn't as strong as the Fed thinks'. Indeed I don't buy into that not just for the US ,but also for the UK and a lot of Europe. My take is that we've seen very real gains in most developed countries starting nearly a couple of years back. Indeed, I think the economies have been and are considerably stronger than current monetary policy would indicate. I travel a lot and see very tangible changes in recent years every where I go compared to the trough years. Indeed, were it not for political risks I think we would have seen current changes re the bond and equity spread earlier still. This isn't particularly tradeable other than as I say I don't buy the 'weak economy' rational anymore and have not for quite some time. I think tat is people still fighting the last 'battle'.
Does not mean some people are struggling ,but was that ever not the case ? For me they are now quite definitely the minority and no handicap that prevents the majority from getting on with decent economic consumption behaviour. Saying that , looking for example at the FTSE there are many stocks there that look fully valued for even that positive outlook.

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Leftback
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January 5, 2017 at 3:52 PM ×

The Fed has been wrong about US growth for each of the last 4 or 5 years, so why should 2017 be any different? ;-)

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Leftback
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January 5, 2017 at 3:53 PM ×

LB has no clue about equities at the moment, but will weigh in with some thoughts on fixed income soon.

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checkmate
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January 5, 2017 at 4:00 PM ×

Left,
By now it should be apparent that I don't think the Fed could button a 'blouse'. That is not to say that I don't simply see that most people are and have been doing just fine for quite some time. In that sense I don't think the economy is 'weak' and it certainly has not required the outrageous level of monetary support that as been delivered.

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Leftback
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January 5, 2017 at 4:12 PM ×

Monetary support was for the banks and the artificially inflated housing units of the Baby Boomers, not the economy. If you think ADP = 150k and flat hourly wages are signs of a strong US economy then OK, it's strong…. "Mr Bond" begs to differ, though. Yields are falling…. more on that in the next few days.

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checkmate
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January 5, 2017 at 4:33 PM ×

Let's try a little logic. Does 'not weak' mean the same as 'strong'?.

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Anonymous
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January 5, 2017 at 4:36 PM ×

Sell the euro, they said...

#MMMGA!

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Polemic
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January 5, 2017 at 4:38 PM ×

Anon 2.58. Yes absolutely. But my hope for a general reversal includes a reversal in eurusd higher too. So double reason.

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Anonymous
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January 5, 2017 at 4:38 PM ×

Got my trade signal on TLT just before Christmas


http://imgur.com/a/5XbcY

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Anonymous
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January 5, 2017 at 4:56 PM ×

Using The Metal Markets to Forecast The Direction of Interest Rates


http://www.athrasher.com/using-metal-markets-forecast-direction-interest-rates/

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washedup
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January 5, 2017 at 5:29 PM ×

@left/Checkmate my two cents - I think job growth in the US will absolutely slow to a run rate of 100k/month - you know why? Because there is literally no one left to hire who has a skill set match - if anything the participation rate will keep dropping globally and CBs will get the inflation they have been wishing for and then some, and trust me no one will like the results when that happens - productivity trends all look ugly, and not just in the US (and please don't peddle some Hal Varian bullshit about how the lovely conversations one has on Facebook should increase the hedonic adjustment). The only productivity goes up in the future is if joblessness does also, and the fact that robots don't need to buy toothpaste and groceries may start to create a few issues here and there.
LB enjoy your TLT rally, I am happy for you and waiting patiently for 123-25 to sell TF out of it. There MAY be another face ripper in it down the line, maybe in a few months when equity bulls finally have their faces hit by a frying pan which they've been itching for, but I have a hunch it may just happen from a lower level.

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johno
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January 5, 2017 at 5:51 PM ×

Oh what fun. Hedgies favorite trades getting destroyed today -- +USDCNH and the proxy, +USDKRW. And along with it, the "if it keeps going up like this and I pyramid, I'll be a billionaire by summer," bitcoin. Oh, and then USDJPY and US rates ... man, so much for the MMGA trades. Perhaps the boredom of Christmases spent with family (if you're lucky, if less lucky, you were imagining how you'd have slit your wrists if you hadn't been accepted by a college far away from home) gave time for the post-election adrenaline to wear off, and as though waking from a dream, participants have awoken to their old Larry Summers secular stagnation paradigm.

Personally, I'm tired of Larry Summers. I was appalled when Michael Gove said, Britons "have had enough of the experts," but now I embrace the new zeitgeist. After all, who here doesn't think academics are a bunch of clueless who presided over a crazy multi-decade credit binge? Enough of the experts indeed.

The CNH strength and XBT weakness probably make the Chinese euphoria optionality in HG less valuable. Still holding my small position, but wouldn't be surprised if IPA turns out right on this one.

At the time of the Fed meeting, I remarked how (what I believe to be) Yellen's "dot" didn't increase. Still rates sold off hard. Well, markets have now gone all the way back to pre-meeting levels, and then some.
With rates quiescent, I decided to get long some RUB and BRL. Probably better to play local rates, but I hate the bid/ask I get shown.

LB w/r/t to wages, Atlanta fed's tracker is looking pretty robust. Wages are coming back, especially adjusted for productivity.

James w/r/t to EUR, vs. rates it looks fair around here. I second the views expressed above that it's become THE funding currency, so should do well in risk-off. The output gap is large, so short rates are probably fairly anchored for a while. Meanwhile, what are the alternatives? CHF? If SNB throws in the towel, you're killed. JPY? US 10Y rates roulette, anyone? Too much of that risk for anyone who wants a boring funding currency to make alpha on their long. So, it's the euro. The USD? Border tax and you are done. Repatriation bill and '03/'04-like reaction, and you're done. Dollar shortage? Done (admittedly, LIBOR-OIS has been falling for months, so looks like less of a risk). So, it's EUR.




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IPA
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January 5, 2017 at 6:37 PM ×

XRT :) I'd rather be lucky than good on any day. But really, who was expecting brick and mortar to do well in this digital economy? Mall traffic is dead and the operators are bailing out bankrupt tenants whose holes they can't refill. What could possibly go wrong next? Short with scaleouts on the way to the ultimate target below the neck of head and shoulders. Will add on any rallies.

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Nico G
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January 5, 2017 at 7:48 PM ×

rossco cheers mate i'll try one more time

checkmate one likes to think economies are not as weak and are mending and then one looks at debt and scratch the head. Make no mistake all that illusion of recovery has been borrowed away at NIR cost and now IRs are shooting up. La commedia e finita.

I travel less than before and probably less than you now but in the 6 countries where i live or visit family every year i observe the following

1) US - not one house is being sold in our Hawaii neighbourhood where 0.2 acre beach shacks priced at $7m were reduced to $6m, then $5m and now $4.5m in two years and not finding a buyer. East side New York had the first downmove in 4 years i believe. From ridiculous levels high in thin air but still, the bidding war is gone. Art price is calming down. Am still using Sothebys (BID) as an international proxy indicator of 'funny money' and the lower highs since 2014 are noted.

the US paid $220bn to service the debt in 2015 so with a cocky $19.8tn to serve and rates up 100bps the debt service just doubled. Anyone worry about that? Our main man Trump would have to go fiscally heavy to recoup but so far his call is 180 degree opposite. Before you try to measure how much concrete is poured how many Caterpillars will be bought to build a wall (and pay up CAT over 30x) you really got to do your simple arithmetic on the great combo of debt service exploding and fiscal largesse announced. I still dream that US would just default on their debt and give a chopsuey middle finger to China. Just for the laugh of it but we'd have to laugh fast since we'd get a war next.

2) Greece is Greece, they just had their first surplus in years (eur 600m) and decided to give it all away to poor pensioners, and not pay back one cent to the Troika. Germany got apeshit mad, Brussels told Germany 'do not upset them or they clearly never pay us back ever' then Germany tells Greece 'well how generous of you but we hope it's a one off'. Greece is one of a kind. The bona fide Robin Hood of Western economies.

3) Italy - will not repeat that the Italian banking system is bankrupt. Pure political play, a lot of haircut to be had, and raising rates are absolutely killing the insane amount of bonds held by those banks (a worldwide issue for banks anyway). 3/3 referendum is oblivion for now but the anger is here and counting. Consider M5S in power whenever next election is held. The (domestic) Italian economy is doing abysmally bad for anyone who is not exporting in dirt cheap euros.

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Nico G
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January 5, 2017 at 7:49 PM ×

4) France - still losing more friends by supporting le Pen the same way i supported Trump and Brexit. Those are difficult choices pertaining to difficult personnalities but motto is fuck the establishment no matter what, you choose Stalin to defeat Hitler any day (i reckon Mnuchin really has the closet sadist in him, Stalin is a good image to describe the ruthless cruelty the former displayed in the foreclosure game). Don't think we'll ever see 4/4 in 12 months with a le Pen win but this is what France need suffices to watch the latest documentary on French suburds discrimination of women and how our gauche caviar sold to Sunni expansion.

broad topic by the way but if you ever want to watch Islamic conquest of the world at work the guidelines have been written by the Isesco:

http://www.isesco.org.ma/wp-content/uploads/2015/05/StrategieExtVELR.pdf

a public document absolutely ignored which compares well to mein Kampf written in 1926 and also ignored at everybody's risk.

5) UK: same observation as US on high end real estate. Funny money has deserted and/or has been disfigured by GBP de facto devaluation. Btw there is a talented guy who lives there and went full on bull in March 2009 with a 20,000 target on Dow Jones. I laughed repeatedly at the dude because i did not understand POMO and shorted counter trend at great expense and look where we are now. He just went 100% cash. Talk about sticking to a plan. And he made a stern bearish call on US equities. The guy was the most stubborn equity bull throughout 2009-2016. It's nice to have his company as we speak

6) Austria: little to say here except that pragmatic Austrians DID read

http://www.isesco.org.ma/wp-content/uploads/2015/05/StrategieExtVELR.pdf

and took action. Quran has to be translated in German, preaching also has to be done in German and Austria has forbid any financing of mosques or coranic schools by foreign powers (in other words, Fick dich Qatar and Saudi Arabia)


If you trade what you see, EUR seems to be a buy here. But it is hard to ignore the slow identity desintegration of Europe. Will the demographic bet on muslim immigration transcend the societal meltdown? or will it force populist governments to take over and kill the European project instead. That, added to the mantra of innovation gap with the US, still goes against any premium held by EUR over USD

are you guys watching Bitcoin meltdown today? stability is not here yet

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Anonymous
admin
January 5, 2017 at 8:49 PM ×

Nico, nice summary.

On the short term trading idea. Now the risk is solely on Trump's first day. He promised that he would take actions toward China and Mexico. Given his recent twitters on GM and Toyota, it looks like that he will deliver. So that is why XRT is tanking IMO and I think there will be many other big name stocks that are likely suffer: not only affected by Trump's action but also China's counter-actions. So short AUD from here? Short BA, CAT, AAPL? What other trading vehicles are still available?

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Up_Side_Down
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January 5, 2017 at 10:00 PM ×

Nico,

great stuff.

As others have said, hang in here, your views and experience are valued

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Anonymous
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January 5, 2017 at 10:17 PM ×

Thanks for the insight Nico

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checkmate
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January 6, 2017 at 12:10 AM ×

Lot of comment off my remark that I don't buy it that economies are 'weak'. Mostly misunderstanding understandably what that comment didn't say which is that I believe monetary policy is to a large degree zero sum. Gainers are funded by losers on the policy distribution merrygoround and 'not weak' does not equate to strong. It just means on aggregate that the majority are muddling on through. This though fades into irrelevance when you consider the degree of misallocation and eventual capital losses that accrue the longer loose monetary policy is in force. To deny that outcome is simply to decry most of what we know about human behaviour and risk taking. In summary, just because I don't think economies are 'weak' to the degree central bankers would have us believe does not mean I don't think they have already sown the seeds of further bad problems ahead.
Believe it when I say thank you for the santa rally ,but it's already in the bank and I'm not worried about leaving any on the table.

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Rossco
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January 6, 2017 at 1:06 AM ×

Regarding the US labour market:

The fed seems not to believe the data as judged by their actions, or inaction on MP

I therefore find it hard to accept that so many market participants judge the data to be axiomatic. For instance, it is widely known that the conventional measure of unemployment has serious shortcomings, particularly with regard to dropping participants out of the survey for various reasons and particularly with understating underemployment.

To blithely state that the unemployment rate is sub 5% therefore we must be about to see a breakout in wage inflation (despite 30 years of history to the contrary) strikes me as lazy thinking in the extreme.

Whilst fully expecting to be shot down for comparing apples with oranges due to cultural differences etc etc I would note the following

"The seasonally adjusted jobless rate in Japan rose to 3.1 percent in November of 2016, from 3 percent in the previous month and above market expectations of 3 percent. The jobs-to-applicants ratio increased to 1.41 percent from 1.4 percent, hitting a new high since July 1991. Unemployment Rate in Japan averaged 2.73 percent from 1953 until 2016, reaching an all time high of 5.60 percent in July of 2009 and a record low of 1.00 percent in November of 1968"

Wheres the inflation in Japan due to a "tight" labour market ? Answer : there isn't any.

This is not your Grandad's labour market. The number is a number to be quoted in newspapers and the like and seems to have very little correlation with ....well......anything

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January 14, 2017 at 4:19 AM ×


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