In October, my view was that the Euro would lose value based on its correlation to lower energy, metal, and global stock markets (see strategy below). I recommended a strategy to buy a EUR TWI Put whose vol was substantially lower as a basket than against any one currency. The trade was initiated when the TWI was above 138 and covered on balance below 130. I covered partially because:
I always trade with stop and profit targets, and
as metals , energies and global markets continued to skid the Euro was not making new lows against the Dollar and the British Pound which combine for nearly 2/3 of the TWI. Performance for the fourth quarter is at approximately 4%.
My view going forward is based on the bold policies of the Bernanke Fed. The Fed and the Treasury are prepared to do whatever it takes to stimulate the economy. U.S. short-term interest rates are at close to zero and may theoretically become negative. Thus, it is clear to me that the U.S. dollar should lose value as the Fed is prepared, via quantitative easing, to provide any and all liquidity to money markets and government deficits. Furthermore, since the Fed is not the only central bank to announce zero interest rate policy, I expect the price of gold to skyrocket over the next two years. Vol levels are just too expensive to buy premium. The best way to play this is with simple open positions and sensible stops.
The flagship strategy of Greenwave Capital (GWC) is a discretionary global macro approach that combines fundamental and quantitative analysis. The goal is to produce consistent absolute returns with low volatility drawdown characteristics. The strategy’s edge is the ability to identify and adapt to changing market conditions.
By the end of August, mounting evidence exposed the increasing risks of a financial systemic breakdown as wealth deflation intensified from lower home prices and stock market values.
GWC’s first thesis is that the challenges of leverage, debt, bank and insurer default are not isolated to the United States but are global. In particular, European homeowners, banks and insurers may be in an even more vulnerable position than their American counterparts. Therefore, the second thesis is the euro currency is overvalued for the following main three reasons:
The credit crunch has set in motion a global demand for U.S. dollars except in Japan.
Central banks are less equipped to stem a run on their currency. The last several years have seen a trend change in reserve shifting amongst central banks out of the U.S. dollar and into other currencies, particularly the euro. Some central banks have secured swap arrangements with the U.S. Federal Reserve Bank mitigating any short-term U.S. dollar outflow. However, nations with significant ties to the European Union (EU), such as Iceland, Turkey, Hungary, Poland and others in Eastern Europe, have all been gravely affected. Their currency devaluation will weigh heavy on the euro for the long term, particularly if they are striving for eventual admission into the EU.
U.S. Federal Reserve Bank vs. European Central Bank (ECB): The political muscle and will of the U.S. Treasury stands behind Bernanke’s Fed. Trichet’s ECB does not share this tactical advantage and therefore cannot implement its policies as comprehensively or swiftly as the Fed. This will translate into greater investor confidence in the United States.
Strategy: Buy a euro put against a Trade Weighted Index. In the past three months, option volatility of various EUR crosses has more than doubled and in some cases tripled. The EUR TWI basket volatility is cheaper vs. vanilla strips as it takes advantage of cross-correlation among its components (USD, GBP, JPY, CHF, SEK).
Structure: At the end of September, GWC bought a six-month EUR TWI with a 133 strike while spot traded at 1.3850. The cost was 0.93% of EUR/USD, risking 35-basis points to the portfolio. Initial target 125/128 and eventually 118/120.
Chief Investment Officer