On March 21st, I wrote "Nassim Taleb Likes Euros And You Should Too." Since then, the euro (FXE) has lost about 4.5% against the U.S. dollar and about 4.8% against the pound, my favored play against the euro at that time. I have since changed stripes and am even net short the euro now. Taleb has yet to flinch. In May, he repeated his preference for investing in Europe over the U.S. although he did not seem to specifically address his currency holdings (see "Taleb Says Euro Breakup 'Not a Big Deal' as U.S. Scariest") - emphasis mine:
Nassim Taleb…said he favors investing in Europe over the U.S. even with the possible breakup of the single European currency in part because of the euro area's superior deficit situation. Europe's lack of a centralized government is another reason it's preferable to invest in the region…When they break it up, there will be a lot of fun currencies. This is why I am not afraid of Europe, or investing in Europe. I'm afraid of the United States.
It is not clear to me whether Taleb dumped his euros in anticipation of a breakup or whether all these "fun currencies" make the euro all the more valuable. My guess is that the market will dump euros the minute a break-up seems all but inevitable.
Regardless, something happened September 5th that finally had me rethinking my rediscovered, extended bearishness on the euro. The Swiss franc (FXF) suddenly came to life against the euro today, AND, most importantly, held its ground. It was a very small move to about 1.204, but the euro has not strayed this far from the artificial 1.20 floor set by the Swiss National Bank (SNB) for more than a day since a quick spike in mid-March.
The euro pops slightly against the franc... and holds
When in June I wrote "It Is Not Over Until the Fat Franc Flies?", I insisted that all rallies in the euro are meaningless until traders and investors are willing to release the tight grip on francs that keeps EUR/CHF pinned to the 1.20 floor. On Wednesday, the euro rallied against both the U.S. dollar and the franc, and, so far, at the time of writing, EUR/CHF has maintained those gains.
The excitement seemed to at least partially come from commentary from Swiss financial authorities suggesting that demand for the Swiss franc is finally easing. Bloomberg reported the following from Swiss Economy Minister Johann Schneider-Ammann on September 5th:
Last year, in the most difficult phase of the franc crisis, we discussed a range of measures and worked to get them ready should the situation change dramatically… But this need doesn't appear to be imminent. There's less of a risk than a year ago that these measures will be used…
…It's absolutely decisive that the European environment remains stable, that confidence in the European financial system isn't questioned... the situation is under control and that's why we don't need to give details on measures. They would be extremely extraordinary steps.
Given the euro's recent rally leading up to a much anticipated European Central Bank (ECB) rate decision on September 6th, it seems that Schneider-Ammann is not the only one getting more comfortable with the euro. Indeed, if Mario Draghi is able to pull off a sterilized bond-buying program that the market likes, I have to assume the risk premium will get significantly shaved off the euro. While it is hard to know what that premium is or just how much of a discount the euro should get given the eurozone's growing recession, I will find it much harder to remain firmly bearish on the euro.
It has been a rough 16 months for the euro. The extended downtrend remains intact despite the recent rally.
With the fat franc starting to sing, I will become even more likely to head for the exits.
Be careful out there!
Disclosure: In forex, I am short the euro and the franc, long the pound. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.