The Badger of Broad Street sells the euro and sterling

It’s time to go back to a thematic shift I predicted a couple of weeks ago – load up on the US dollar and sell the Euro. The big shift has started following Thursday’s ECB meeting!

It would be a mistake to think the miniscule 10 basis point cut in rates is meaningful. It’s not. What is important is back door QE through asset backed bond purchases. The immediate “beneficiary” is the Euro – it is falling, and that’s a great thing for Europe.

Since July we’ve seen the Euro decline from 1.37 to 1.29 versus the dollar – and I reckon it’s headed for 1.20 in pretty short order. That will mean the Euro will be at the bottom of the 1.20/1.50 corridor it’s been trading at since 2004. I’m even thinking the Euro could go lower – into a new 1.20/1.00 band.

Goldman Sachs sees it declining to parity – not seen since 2002 – by 2016.

That’s Draghi’s big success, moving the Euro into a devaluation shift by announcing an expansion of the ECB’s balance sheet that won’t even begin till October. European interest rates will remain low, the Euro will fall, the risk of deflation diminishes and suddenly Europe’s lacklustre corporate sectors start to look competitive again.. Whoopee!

And, therein will lie the rub.

As the Euro declines, at some point the global investors who piled into Spanish bonds when the yield was 5% plus (10-yrs is now 2%) will sell up. They’ll be piling back into other non Euro assets – guess what? US Treasuries methinks. Not just because they are liquid and safe, but the risks of a massive hike in US rates are vastly over-rated in the medium term.

What we’ll also see is a massive iteration of the famous carry trade – where investors borrow low interest rate Euros and use them to buy higher yielding dollar assets. Puts further downward momentum pressure on the Euro.

Meanwhile, things back here in Blighty aren’t looking so good.

Sure the economy is picking up and everything looks fine and dandy. But suddenly the rebellious Scots could be on the verge of destroying absolutely everything. In the last few days we’ve seen the polls suggest the “Yes” to independence vote pulling close to the “No” vote. Just a few weeks ago the markets stopped worrying about the split up of the UK – the “Yes” vote was so far behind.

Suddenly it looks a very real threat. There are rumours the next poll will show Salmond and the “Yes” vote in the lead.

That will prove a real quandary, giving just a few days to hold the Union together.

What would do it? Well… here’s an idea. Apparently many Scots don’t actually care about their future – their prime concern is to get rid of Cameron. So, to save the Union is it time for Dave to fall on his proverbial sword for his abject failure to counter Salmond?

Whatever happens it does look like the trade to do is sell sterling, sell any company with any hint of Scots in its genes, and perversely buy gilts as a safe haven through the bitter divorce about to come.

And my second trade of the week – buy dollars and buy some more…

Badger