Saturday, 2 February 2013

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.


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


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