On FX

Reposted from Bruce Krasting’s blog with his permission.

Want to see a completely wrong headline? Here’s mine from seven months ago:

The “deal” that I was referring to in this piece was changed dramatically from the one that is being worked on with creditors today.The haircut on bonds has changed, and the yields on the back end paper have been reduced, but I don’t think it matters. The deal that is now on the table has, in my opinion, very little chance of getting inked. I’m betting against it.

Having been as wrong as I was a half-year ago, I’m very skeptical today. My bottom line on this is:

There will be no Greek deal. What is being discussed today will never get signed. As a result, there will be a payment default by Greece during March. By April, Greece will be forced out of the EU.

This will have significant consequences across a variety of markets, the most obvious would be in the EURUSD.

My last thoughts on the EURUSD were on January 7th (LINK)where I acknowledged that I had eliminated my CASH (futures) short EURUSD and replaced it with short Euro option positions. That call was a “half right”. At the time of that blog the EURUSD was 1.2750 (vs. the 1.3115 close in NYC today). Switching from a cash short to an option short saved me a bit of money, and a few sleepless night as the Euro found a bid and made a halfway decent recovery against the Buck.

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As of today I am back short the Euro on a cash basis (I kept the $ call options from 1/7/2012). I think some big disappointments are in front of us on the various problem countries of Europe as the implications of a busted Greek deal are realized.

I think EURUSD will be 1.2500 or lower (5% upside on the trade) by the end of March. A nice “tradable” move.

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