Wednesday, March 03, 2010

Euro Being Shorted In A Big Way - Collusion?


On January 20, the euro fell to a five-month low against the U.S. dollar (USD) to trade at 1.4160, due to concerns about the fiscal crisis in Greece. On February 5, 2010, the Euro fell to US$ 1.3638 on budget concerns in Greece, Spain and Portugal. It had traded as high as US$1.50 in October 2009. Several hedge funds have placed big bearish bets against the euro, with some speculating the single European unit will fall to parity with the dollar. On February 8, 2010, traders and hedge funds bet US$8 billion against the euro, the largest short position in the currency ever, due to concerns over contagion from the Greek budget crisis.

Apparently the large bets against the euro emerged following an exclusive "idea dinner" earlier this month that included hedge-fund titans SAC Capital Advisors LP and Soros Fund Management LLC. During the dinner, hosted by a boutique investment bank at a private townhouse in Manhattan, a small group of all-star hedge fund managers argued that the euro is likely to fall to equal on an exchange basis with the dollar.

I really don't think you need some parties to collude to weaken the euro. If the patient wasn't very sick already, the vultures would not be circling. The elite traders' bearish bets, reminiscent of the trading action at the height of the US financial crisis, had added to the selling pressure on the currency, and to the pressure on the European Union to stem the Greek debt crisis. Yes, it has added to the downward pressure but you cannot blame the traders.

However, the main street readers would like to bash Soros and fellow hedge funds managers for the woes. They remember the US crisis, which shook the foundation of the financial industry and plunged the world's largest economy into its worst recession in decades, hit peak levels in late 2008 with the collapse of Lehman Brothers.

Bundled euro banknotes. A group of hedge funds have launched ...

At that time major hedge fund managers, such as Greenlight Capital chief David Einhorn, who also was at this month's euro-dominated dinner, determined that the fortunes of Lehman and other firms were dim and bet heavily against their securities, accelerating their fall.

An SAC manager, Aaron Cowen, who pitched the group on the bearish bet, said he viewed all possible outcomes relating to the Greek debt crisis as negative for the euro. SAC's trading position on the euro is unclear.

George Soros, head of his 27 billion dollar asset fund, warned last weekend that if the EU did not fix its finances, "the euro may fall apart." A spokesman for Soros Fund Management said the legendary investor did not attend the dinner on February 8, but did not deny that his firm was represented. At the dinner, the speculators are said to have argued that the euro is likely to plunge in value to parity with the dollar.

The single currency has been under enormous pressure because of Greece's debt crisis, plus financial worries in Portugal, Italy, Spain and Ireland. But, it has also struggled because hedge funds have been placing huge bets on the currency's decline, which could make the speculators hundreds of millions of pounds.

Mr Soros, who made more than $1billion by currency speculation when the pound was ejected from the Exchange Rate Mechanism on Black Wednesday in 1992, believes the structure of the euro is 'patently flawed'.

Greece is desperate to restore the confidence of investors in its debt after revealing that the previous government understated its budget deficit by half. Outlining the precarious nature of Greece's finances, Mr Papandreou said: 'There is only one dilemma: Will we let the country go bankrupt or will we react? Will we let the speculators strangle us, or will we take our fate in our own hands?'

The Greek leader also called for more help from the EU with its debt crisis. Until now, the EU has offered political support but no bailout.

I do not see parity but I think it will get very close, maybe 1.15 within 6 months.

Don't shoot the messenger!

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