FT.com / Currencies - Bets against the euro hit record levels.
Short-term speculators have raised their bets against the euro to record levels.
Positioning data from the Chicago Mercantile Exchange, often used as a proxy for hedge fund activity, showed speculators extended their short positions in the euro from 103,400 contracts to 113,900 contracts, or $18bn, in the week to May 7.
With complete contempt for society as we know it the markets attempt to bring down the Euro, utterly indifferent to the consequences for democracy, ordinary people, peace or anything else.
And you wonder why so many of us want hedge funds regulated?
Let's start with defending society as we know it as the opening bid and move on from there shall we?
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That’s not how futures markets work. There is an equal amount of long interest. Some people may be long but there is an equal amount of “speculation” or it could just as easily be “hedging”.
@Alex
How do you know
Why is the FT wrong?
Or it could be that hedge funds have concluded that the only way out of this mess is for Germany to accept a higher inflation rate in order for the South to avoid deflation, the consequences of which would mean a far weaker Euro. I think you made the same argument yourself.
@Richard Murphy
Because there are 2 sides to a futures contract. For every counterparty who takes a short position there has to be another party who takes a long position to complete the trade. What the FT means is that there is a historically high volume of open interest on the exchange, but that does not necessarily imply upwards or downwards pressure, merely that there has been a long period of sustained interest in the USD/EUR currency pair that has generated that large amount of open interest.
Open interest does not represent the net exposure of parties. If speculators/hedgers had sold the Euro at one price, then bought it back at a lower price under a second price and then sold again before the first two contracts had been settled, then the open interest would be 3 times the counterparties net exposure.
Richard, by definition any derivatives market will have as many shorts as longs.
Think on it for a moment. If you go short you are betting that the euro will fall. But who are you betting with? You do have to be betting with someone don’t you?
That’s right, you’re betting with someone who does not think they euro will fall and who is aiming to take your money off you when it doesn’t.
So, given that there must be two parts to any derivative contract there must, by definition, be as many longs as shorts. The issuance (or purchase) of a short contract necessarily entails the creation of a long contract on the other side of it.
that’s part of it. The other part is that even if futures markets worked in the way that you describe, the speculators would be doing us all a favour. Imagine that they did in fact drive the euro down. What would happen?
The value of the euro falls of course. This makes imports more expensive….leading to imported inflation. You do keep telling us that inflation would be a good idea right now (and Paul Krugman and even I agree to a point. Only inflation will make the changes in relative real wages possible given that nominal wages are highly sticky).
A lower euro will also make exports cheaper to those outside the eurozone. That plus import substitution (for those now more expensive imports) will lead to economic growth…..which in turn should lead to both more inflation and also a larger economy to pay off the debts.
A lower euro is a really good thing to be happening right now.
So, speculators, by definition, have to include as many longs as shorts and even if they did push the euro down this would be something we should applaud, even desire.
“Some people may be long but there is an equal amount of “speculation” or it could just as easily be “hedging”.
Well sort of but not really. This position the FT quotes is a ‘net short’ position, the difference between longs and shorts. The CFTC does have defined categories of ‘speculator’ and ‘hedger’ and this is showing the net position of the speculators (the hedgers, by definition*, will be exactly as long as the speculators are short).
* Not quite as there are a couple of other categories.
@Richard Murphy
Putting aside for a second your blatant ignorance of basic financial economics, I thought that you were in favor of higher inflation to help clean up some of the unsustainable amounts of debt across the European financial system.
A weaker Euro is great way to start. So should you not send these hedge funds a nice thank you card.
Well, I note no one has said why the FT was wrong
And it clearly supports my view
So tell me more – why are they wrong to say this is not an attack on the Euro
After all – Soros had counter parties in 1992 – but it did not stop it being an attack on the pound
So whilst your logic is sound why don’t you disclose your whole hand rather than play the trite card of “theory says” – which is what you’re doing now
Who are the counter parties> let’s start there, shall we?
I thought the problem at the time was there were no more counterparties other than the central bank itself, selling its foreign exchange reserves.
There is no suggestion here that the ECB is involved in the futures market (it might be in the spot market though). Counterparties are other hedge funds, banks, corporate treasuries, aliens from outer-space, who knows. The point is that for every seller there is a willing buyer.
@Ted G
” There is no suggestion here that the ECB is involved in the futures market (it might be in the spot market though).”
a) How do you know?
b) In what amount?
Unless you can answer that your comment on willing buyers and sellers is trite
So Richard, are you telling us that the ECB is involved in the futures market?
@Ted G
Do you know they aren’t?
@Richard Murphy
And you still haven’t said why the FT thought this story significant bar the reason I do too
“After all – Soros had counter parties in 1992 – but it did not stop it being an attack on the pound”
It wasn’t an attack on the pound. When Soros “won” the pound did not disappear, did it? It was an attack on the external exchange rate of the pound. Which when Soros “won” declined to the great benefit of the UK economy.
As I’ve said above, even if the markets really do work like you think (which they don’t) the attack is not upon the existence of the euro nor the euro system or European integration. It’s upon the exchange rate between the euro and the $. And Europe would be better off with a lower value of the euro for the reasons I’ve given above.
Think it through for a moment. If the euro went to 80 cents again then exports from the eurozone would boom, as would inflation inside the euroaone. Isn’t that exactly what you keep telling us should happen anyway?
And the growth that would come from the exports and the relief of the strains on real wages would lead to the euro itself being more likely to survive, not less.
Of dear Tim. If all was as sweet as you’d like it to be with perfectly correcting, instantaneous clearing markets with no externalities arising. It’s a simple world you live in, isn”t it?
The real world is quite unlike that – though it appears you have not noticed.
In the real world the exchange rate differential may have nothing to with reality – but market fixing
And in the real world the correction from that imperfect scenario is costly on real people’s lives
Some of us care about that – although you make it clear day by day that you don’t
You’re wrong in theory
You’re wrong in practice
And you do not understand the consequence of what you say
Apart from that, spot on Tim
Full marks
‘And in the real world the correction from that imperfect scenario is costly on real people’s lives’
How, exactly? Please could you enlighten us poor ignorant fools?
@James Tyler
Let’s start with unemployment
The closing of schools
The ending of care
A lack of medical provision
The break down of law and order when the police aren’t paid
Are you really incapable of imagining those consequences of the money markets attack on government?
If so, yes poor ignorant fool is an apt title
Richard,
I’ve not said anything at all about perfectly clearing, instantaneous markets. Where on earth have you got that from?
As to externalities….can we see some evidence of the ill effect of them please?
My comments above have been that the “externalities” of a decline in the international value of the euro would be beneficial. There would be more inflation in the eurozone (something you yourself say is desirable) plus there would be an expansion of the economy through both increased exports and import substitution.
True, there would also be a decline in the external value of current euro holdings….but then inflation itself (which you support) would cause that anyway.
This is the thing that annoys me so much about your pronouncements upon economics. You seem not to be able to piece them together. You yourself argue for higher inflation as a way out of current problems. You yourself argue for inflation as a way for real wages to adjust while nominal wages can still be static or rise. You yourself argue for inflation as a method of alleviating the debt burden. You yourself argue that growth is the way out of current problems.
Yet a devaluation of the euro is precisely a method of getting these things and yet you argue against a devaluation of the euro.
Why? Do you not realise that a devaluation of the euro would bring all of the things that you claim are solutions to the problems?
You still haven’t explained how all those things get killed off by the price of the euro in terms of US$ reverting to a level it was 5 years ago….
How is the price of Euros in terms of the US$ in any way related to the ability of a government’s ability to pay a salary? Why should my Greek uncle care how many Big Macs he can buy in New York with his pension?
“The break down of law and order when the police aren’t paid”
Well actually, they are. In Euros. Just like before. The only difference is now they can’t afford to buy stuff from dirty foreigners. Especially dirty American capitalist right wing Bushitler redneck foreigners.
Now the coppers must buy local, by which I mean within the EU.
So it’s all good, right? Isn’t buy local one of your buzz-phrases?
Richard, I read this blog because I genuinely want to try and understand the left of centre viewpoint: via reason and logic. So it really is dispiriting to see you sneer, attack and then delete rather than explain your assertions. You say in previous postings that you want inflation. A depreciating currency is a classic way of acheiving this.
I just want to understand why you beleive a currency ‘under attack’ leads to some of the things you say it will. It may be obvious to you, but it isn’t to me: especially for a currency bloc as huge as Europe. Empirically speaking, these things did NOT happen to the UK after Soros forced it out of the ERM.
Or, instead of reason, you can just assume I am just a troll and delete away.
@Tim Worstall
Tim
If you don’t understand the assumptions of the Chicago school to which you adhere go back to 101 I suggest
Richard
@James Tyler
Revaluation is fine. The Euro looked overvalued. I have no problem with revision.
I have massive problem with accumulated market attacks creating instability in markets knocking over into instability for government deliberately created by markets
And that’s what Greece has / is facing (and no it’s not innocent – but it does not deserve the punishment) and Spain et al face
You all seem oblivious to this
Economists to the core.
And as James Galbraith has recently said:
The following is the text of James Galbraith‘s written statement to members of the Senate Judiciary Committee delivered a few days ago.
Chairman Specter, Ranking Member Graham, Members of the Subcommittee, as a former member of the congressional staff it is a pleasure to submit this statement for your record.
I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis. Concepts including “rational expectations,” “market discipline,” and the “efficient markets hypothesis” led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur. Not all economists believed this — but most did.
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