EUR and GBP comment from NAB Currency Strategist Nick Parsons. – A psychological twist on market/investor behaviour.

I do not normally do market commentary or calls on this blog. – Though I have made the odd attempt, most notably, here on Apple Inc last April, a call which was wrong, being 6 months too early; such is the difficulty of timing bubble tops, and here on the EURUSD and EURSEK, from last August which proved nice timing, and a profitable little trade for me (See update on this chart at foot of this article.  – However, today I am adding a comment from yesterday from my one of my favourite currency strategists,  Nick Parsons of National Australia Bank. Nick is that rare breed, an economist who thinks about the market in terms of sentiment and positioning, as well as fundamentals and macro factors. Nick is well aware that markets are not just moved by the news and data released, but by the fears and desires of spectators as individuals and groups. More precisely, speculation is less about what you think, and more about what you think everybody else is thinking and doing. Those of you familiar with the work of John Maynard Keynes will of course recognise this as akin to the Keynesian Beauty Contest. – I hope you enjoy his article.

Friday, February 01, 2013 8:39 AM Subject: Nick Parsons-Daily Market Commentary February 1st 2013
Honoured as I was to be speaking at London ACI last evening, I was asked at what point the EUR would stop going up. The smart answer to this question requires neither a level nor a timeframe. Instead, I replied the euro will carry on rising until everyone owns it. When the last buyer has bought and there are no potential buyers left, then it will stop going up. We appear not yet to be at that point, mostly because there are some exceptionally bad investors and perverse incentives out there. 

In the fourth quarter of 2012, it was virtually impossible to find anyone with a benchmark weighting in the euro. Bulls, meantime, were simply non-existent. Even those people who could have been persuaded to scale back their short positions were afraid of doing so lest they got it wrong. The fear of being wrong completely overrode the desire to be right. (Ed: Underline emphasis added  to highlight the psychological aspect here). Looked at another way, making five big figures profit might not have brought a bonus but a five big figure loss would probably have led to the sack. After all, wasn't it obvious to everyone that the euro was a doomed project, set imminently to collapse? Being short the euro was the job-preservation trade. Since the middle of last year, our end-2012 forecast for EUR/USD was 1.33 and I lost count of the number of disbelieving, aggressive shakes of the head and vitriolic abuse this view was generally met with. Well here we are above 1.35 and despite a rush to buy euros given the freedom that a change of calendar year can bring, portfolio flows probably still have further to go, not least since some very big name houses are still peddling a sub-1.20 view to their unfortunate audiences. But, just as a currency goes up until the last buyer has bought, so it can go down until the last seller has sold. Our bearishness on the formerly proud pound has been well-documented here and elsewhere. That old maxim "never buy a pound you haven't already sold" still rings loudly on these old shoulders. Unfortunately, it appears in the very near-term that this view - and, crucially, this position - is now held not just by every forex professional, but every spread-better, taxi-driver, journalist and commentator. The pound has fallen a long way in the last 10 weeks, not just because the UK economy is an absolute dog, but its prior status as a supposed safe-haven goes into complete reverse if no-one now wants or needs one. Nothing whatsoever could persuade me to recommend a long position in sterling from current levels. Indeed, the likelihood of more dreadful data on retail sales, industrial production and retail sales during February and the BoE QIR Press Conference on Feb 13th will probably be fresh sterling negatives. At a time when everyone appears to now have the same position; however, it's quite possible that today will be the day we get to exit our short position. Fingers crossed, then, for a lousy PMI number at 09.30.

P.S.1

GBP PMI was weaker than expected, and GBP suffered another very poor day's price action. 

P.S. 2 

Below is an update to the EURSEK(EURUSD) comparison v Bund chart mentioned above.

"Euro Sign And Up Arrow On Screen" Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Some commentary on the Irish Situation.

Good morning.

My first week for some time of non-blogging, and a very interesting week its been. The Irish/European Crisis seems to have come to a head (for now), and the markets saw some very strong corrective activity, which has certainly helped to de-froth them, particularly in the wake of the QE2 announcement.

In line with my earlier comment from this week, where I announced I will be slightly stepping back from daily blogging, I still intend to occasionally update my page, including a weekly blog at least. I hope to get some analytical stuff out on Monday. For now however I would like to post (or refer) to a couple of articles from other contributors.

The first posting is by NAB economist, and ex-colleague of mine Nick Parsons. Nick is a brilliant economist who has great understanding of markets from both an economist's angle, and having worked closely with traders for many years, a trader's angle. His commentaries and writing style are wonderfully perceptive, witty, and slightly acerbic, all at the same time. Here is his commentary for today (19th Nov):

As millions of freckle-faced, tousle-haired Irish kids set off for school this morning, they’d be well advised to pay attention in their German lessons. It might not be a bad idea to stay awake during Economics too, and they might even find basic Mathematics comes in pretty handy. Their parents’ generation, unfortunately, spent too much time in Politics and Creative Writing classes whilst making the elementary mistake of studying History but failing to learn from it. We have the laughable but tragic situation today of hearing Irish political leaders insist on what is non-negotiable as if somehow they will ultimately have any say in the matter. To be sure, it’s the only bargaining tool they have and they might as well use it, but threatening to bring about the collapse of a European project which has been more than 60 years in the making will cut no ice in Brussels or Berlin. Dressing up a sovereign bailout as a mere accounting issue, a technical plan to provide a loan to the banking system, should fool no-one. Crucially, it’s unlikely to impress the European Central Bank, which is finding its mandate to ensure price stability increasingly undermined by a new requirement to become the lender of first resort to a bankrupt system. The Frankfurt-based ECB is likely to be headed next year by a German central banker. This will be the minimum price for German acceptance of a commitment to underwrite the EFSF for what could become perpetuity. The German economy is booming and a German-led ECB in Germany will increasingly set interest rates for the good of Germany. So it’s not just the Irish who should concentrate in school today. The rest of Europe, like it or not, is likely to find out soon that real power lies with creditors, not debtors.

The second article of the day is from the 'Daily Telegraph' newspaper. The Telegraph is the most widely read of what are known as the Broadsheet newspapers here in the UK: These include -'The Times', 'The Financial Times', 'The Guardian', and 'The Independent'. The article is entitled 'Margaret Thatcher knew the single currency would devastate Europe'. and can be viewed by hitting the highlighted link. I have always considered Margaret Thatcher as the greatest British Prime Minister during my lifetime - by a country mile. However she and many of her followers have often been maligned in the British press, yet she was one of that rare breed that had the courage of her convictions and did what she thought was right for the country, not what was popular, or right according to the opinion polls and columnists.

I think if you read the piece fully you may appreciate our lucky escape here in the UK, and although Margaret Thatcher fell from power in the early 90s, I think her influence and opposition at the time to joining the Euro built up enough of a head of steam to ensure that it never materialised in the ensuing years. In fact looking now at what is happening a short hop across the Irish sea from us, I can't helping thinking that joining the Euro may have achieved for Germany over the UK what 2 World Wars failed to achieve.

At that point I will bid you all a great weekend.