Market Maniac

Bring on the lederhosen
Jul 15, 2014

Back in the day when all the men were strong, all the women were good looking and all the children were above average [with thanks to The Prairie Home Companion, a US radio show from back in the day], dollar strength (or weakness) really meant something.
 

When the dollar went up, everything else (sterling, the Deutschemark, French franc, Japanese yen, gold) went down; or the reverse happened – the dollar went down and everything rallied. There were occasional bouts of diversion from this model, when certain specific currencies – most often sterling and sometimes oddments like the Italian lira and, very occasionally, the French franc – did something strange, but, in general, if you could figure out the dollar, you would do pretty well.

Of course, this hegemony of the dollar merely reflected the US’ position in the world – the Biggest Daddy of the Free World, and, after the collapse of the Soviet Union (1991), the Only Daddy Around. Indeed, even after the Euro was born in 1999, this singular position of the dollar – with EUR/USD and USD/JPY moving in tandem as much as 87-88% of the time – remained n place all the way till May 2011, through even the Lehman Brothers collapse.
 

Then came the European sovereign debt crisis and – in FX markets as elsewhere – all hell broke loose. The correlation between Europe and the rest of the non-dollar world fell apart, with EUR/USD and JPY/USD moving in synch as little as 30% of the time between May 2011 and May 2013. It was as if, from a FX point of view, at least, Europe was being stripped away from US domination.

Running its own show, the Euro sank like a stone, but, more frighteningly, it looked increasingly like it was curtains for the Euro and that it would fall apart.

But, there out on the hill, stood Germany. Discreet, as always, at first, but then donning shining silver lederhosen, it slowly but surely acknowledged that it was taking full charge of the Eurozone.
 

While, of course, the political fictions remain – the ECB is different from the Bundesbank; the European Parliament is more than a comedy show – the truth is that, at some level, markets must have always known that if ever things turned sour, Germany would step in and take control. The Euro could never have sustained substantially above 1.15 or 1.20 if the market didn’t believe in the German defensive line – only 4 goals in 8 matches.

With this belief confirmed, the market has been steadily returning to what some see as excessive stability. Currency volatilities are at all time lows, high-yield (including European sovereign) bonds are rocking, as are equities. The wobble in Portugal last week was a thin reminder of the bad old days, but then, remembering how comprehensively Germany managed Portugal in the World Cup, the market simply shrugged it off.

Interestingly, the correlation between the EUR and JPY has been slowly recovering – it is back above 50%, a long ways from the 85+% that prevailed in the status quo years, but still quite a jump from the 30% correlation when it looked like the Euro was going to fall apart. The question is whether markets will continue the trend back to the future or whether a lower correlation will hold, reflecting the reality that Europe (led by Germany) is becoming more independent of the USD-dominated world that had prevailed thus far.

Indeed, the US’ geopolitical fumblings over the past decade, particularly in Iraq where the godawful results are there for all to see, suggest a crying need for a new paradigm. [As an aside, I wonder what would have happened if, instead of invading Iraq, Bush had invaded Saudi Arabia – certainly, a huge amount of global terrorist funding would have dried up; perhaps, the Shia-Sunni schism, which US action against Iran (instigated, of course, by Saudi Wahhabism) has continuously aggravated, may have been less cancerous today; and oil prices – well, they’d likely be more or less where they are today.]

In any event, the US is increasingly – and appropriately – focused inwards. This is good, both for the US (which needs to find a solution to the huge equality gap that is widening) and for the rest of the world (that ultimately benefits from surges in American creativity, which is often the result of American introspection).

It is clearly time that Germany – with unquestioned sound process and, importantly, occasional flair – steps up to the plate. Perhaps, its World Cup victory will provide the impetus.



Archives

Bring on the lederhosen
Jul 15, 2014

Can one man be enough?
Jul 03, 2014

Live another day
Jun 19, 2014

Back to the pavilion
Jun 08, 2014

Rebooting AAP
Jun 05, 2014

Stay close to the exits
May 28, 2014

Stay close to the exits
May 28, 2014

We need heroism not heropanty
May 22, 2014

Fighting last year’s battle
Apr 29, 2014

Fighting last year’s battle
Apr 29, 2014

Burning money
Apr 15, 2014

How low can it go…
Apr 01, 2014

Stability? What stability?
Mar 18, 2014

Be careful with horses
Mar 03, 2014

Dear Prudence
Feb 17, 2014

Paradigms shifting
Feb 05, 2014

The revolution is being televised
Jan 15, 2014

Volatility is here to stay
Jan 06, 2014

Truly, a new India
Dec 10, 2013

It ain’t the market
Nov 25, 2013

A more Islamic world
Nov 13, 2013

Poker lessons
Oct 30, 2013

The rupee in 2030
Oct 14, 2013

Snakes and Ladders
Sep 30, 2013

Accountability and Governance
Sep 23, 2013

Ideal Boy Rides Again
Sep 10, 2013

Time to thank the "Speculators"
Aug 29, 2013

The only way out
Aug 19, 2013

Why companies don’t hedge
Jul 31, 2013

Circular reasoning
Jul 22, 2013

Vitamin G
Jul 09, 2013

The correct value of the rupee
Jun 24, 2013

Lessons in risk management
Jun 07, 2013

Waltzing Matilda
May 20, 2013

Managing Volatility
May 13, 2013

Selling India in America
Apr 30, 2013

Joy and hope in Cochin
Apr 01, 2013

How bad can it get ?
Mar 18, 2013

Love me tender
Mar 06, 2013

Special More-Than-26
Mar 01, 2013

A Real Currency War
Feb 18, 2013

Controlling Gold Imports
Jan 24, 2013

So, What’s with the Yen
Jan 11, 2013

A New Goa
Jan 04, 2013

As the Year Turns…
Dec 19, 2012

Meaningful Financial Innovation
Dec 10, 2012

To ECB or not to ECB
Nov 26, 2012

On to 2016!
Nov 08, 2012

RBI should Embrace Speculation
Oct 29, 2012

Congratulations, Eurozone
Oct 16, 2012

Havala, Politics and The Rupee
Oct 03, 2012

Champagne and Vada Pao – Again?
Sep 18, 2012

SNAP! CRACKLE! POP!
Sep 15, 2012

Measuring Business Margins Correctly
Sep 12, 2012

Is the Dollar about to weaken ?
Sep 03, 2012

The smart money’s on Obama
Aug 27, 2012

Making Money isn’t Supposed to be Easy
Aug 17, 2012

The Rupee Fan
Jul 31, 2012

I'll Do Anything...
Jul 30, 2012

How did Bankers Become Sexy?
Jul 19, 2012

Has a Serious Dollar Rally Begun ?
Jul 09, 2012

A Car Crash in Slow Motion
Jul 03, 2012

Measuring Sentiment
Jun 26, 2012

47 to 57 in 2012 – ha !
Jun 07, 2012

Who is tomorrow’s Narasimha Rao ?
May 25, 2012

When The Going Gets Tough…
May 21, 2012

Is The Euro Going Down?
Apr 27, 2012

Getting More Out of the FX Market
Apr 11, 2012

Nandan Nilekani ki Jai
Apr 02, 2012

The Conundrum of FX Borrowings
Mar 19, 2012

Those Glittering Assets
Mar 05, 2012

Global Turbulence – More to Come
Feb 17, 2012

A Near-Sure Thing
Feb 09, 2012

What was That Bearded Man Thinking?
Feb 06, 2012

The Anomalous Strength of the Rupee
Jan 23, 2012

Nothing Ideological About It
Jan 09, 2012

The FX Market In 2012
Dec 29, 2011

Party Time!
Dec 26, 2011

ONE CHEER FOR RBI
Dec 19, 2011

India Is Not Going To Hell
Dec 07, 2011

So What’s Happening To The Rupee?
Nov 28, 2011

Intervene Today; Deregulate Tomorrow
Nov 21, 2011

C’mon Mr. Cain
Nov 09, 2011

Keep On Praying
Oct 31, 2011

Acting Lessons for RBI
Oct 17, 2011

A Brave New (Globalized) World
Sep 29, 2011

A Different Kind of Fool
Sep 23, 2011

European Football and a Dollar Rally
Sep 16, 2011

Will The Collapsing Euro Save Itself
Sep 12, 2011

Making Hedging Markets More Effective
Sep 05, 2011

The Anna Effect and Other Joyous Animals
Aug 29, 2011

Betting on a Range-bound Rupee
Aug 22, 2011

Shoot the Messenger
Aug 08, 2011

Benchmarking Treasury Performance
Aug 02, 2011

Betting on a Range-bound Rupee
Aug 01, 2011

Lesson From My Father – Redux
Jul 14, 2011

Welcome to Turkey
Jul 08, 2011

Has RBI Lost Control of the Rupee
Jun 27, 2011

Managing Raw Material Price Risk
Jun 06, 2011

Third Time Lucky?
May 30, 2011

Light Up and the Bus will come
May 09, 2011

Time To Fast-track Full Convertibility
Apr 25, 2011

A Tribute to Sarah Wells
Apr 08, 2011

Three Birds With Two Stones
Mar 18, 2011

Another Step Towards a New Islam
Mar 11, 2011

Bhrabo!
Feb 28, 2011

Another Step Towards a New Islam
Feb 22, 2011

Don’t Arabs Love Gold Any More?
Feb 08, 2011

Thank you, Anish Kapoor
Jan 28, 2011

Faint Heart Never Won Fair Lady
Jan 25, 2011

Beyond the Inflexion Point
Jan 07, 2011

Visibility: Poor
Dec 30, 2010

India 2030: May The God Of Your Choice Bless You
Dec 06, 2010

The New G-7
Nov 26, 2010

Thoughts From Turkey (and Elsewhere)
Nov 16, 2010

Takeaways From the 2nd Quarter Review of Monetary Policy
Nov 03, 2010

The Rise of a New Europe
Oct 25, 2010

(Another) Lesson From the Past
Oct 08, 2010

The OTC FX Market – Falling Behind the Curve
Sep 24, 2010

Unnatural Hedging
Sep 03, 2010

Smile Darlin’, It’s Better Than You Think
Aug 23, 2010

Do You Believe in Empirical Evidence?
Jul 30, 2010

Could the Rupee Hit 50 Again?
Jul 22, 2010

Higher Volatility Ahead?
Jul 14, 2010

A Return to Values?
Jul 01, 2010

Don’t Cry for Me, Maradona
Jun 21, 2010

Could the World Cup Trigger a Correction in the Euro?
Jun 11, 2010

The Next Cycle
Jun 02, 2010

I Hate to Say It, but…
May 24, 2010

W(h)ither the Euro – a Fable
May 05, 2010

Could the Euro Go into Long-term Decline
Apr 09, 2010

Enabling Better Profits for Small Exporters
Apr 05, 2010

Shades of Enron
Mar 22, 2010

Bt or Not To Be
Mar 16, 2010

Post Budget: A New Paradigm
Feb 26, 2010

Budget Ideas for The Financial Sector
Feb 19, 2010

Time For More Aggressive Regulation
Feb 03, 2010

American Breakfast
Jan 25, 2010

The CAG handicap
Jan 11, 2010

Bringing Hedgers to the Futures Market
Dec 30, 2009

The Major Currency Risk In 2010
Dec 16, 2009

God Bless You, Mr. Obama
Dec 11, 2009

Dear Mr. Bhave (and Dr. Subbarao)
Dec 03, 2009

Has RBI been diversifying out of dollars?
Nov 16, 2009

Welcome To Vegas
Nov 02, 2009

Rabbit in the headlights – again
Oct 09, 2009

The calm after the storm
Sep 25, 2009

Sufferin’ Art
Sep 11, 2009

Is it time to hedge your interest rate risk
Aug 31, 2009

Unconventional wisdom
Aug 31, 2009

A gift for the chairman's wife
Aug 17, 2009

Surf’s up!
Aug 01, 2009

Dr. Subbarao As Tiger: 25% Visibility, 75% Ability
Jul 28, 2009

Coming of age
Jul 20, 2009

Thoughts on the budget
Jul 09, 2009

Guinness is good for you
Jul 02, 2009

Will it rain the day after tomorrow?
Jun 08, 2009

Cleaning the Augean Stables
May 19, 2009

Bali Hai
May 14, 2009

Another exotic bet
Apr 27, 2009

Buy US corporate bonds
Apr 24, 2009

Mumbai chi Meera
Apr 13, 2009

Turning around cautiously
Mar 30, 2009

The curious role of the forex committee
Mar 16, 2009

Green shoots
Mar 02, 2009

The Party Party
Feb 16, 2009

Obama is Jamal
Feb 02, 2009

Who do you trust?
Jan 19, 2009

The New American Dream
Jan 05, 2009