On Gold, Dollars, & Bitcoin

We have been bullish on gold – the barbarous relic; King Dollar – the modern hegemon; and Bitcoin – the crypto currency investors love to hate. One might say our feet have been planted firmly in the past, present and future. (We may not have three feet, but let’s go with it.) Are we hedging our bets, being too cute by half, or is there a cogent rationale that unifies bullishness for money forms most would consider incongruous and at-odds with each other?

The short answer is we like:

1) gold, because central banks around the world own it and are buying more, ostensibly to devalue their fiat currencies against it someday, after they are forced to hyper-inflate in order to reduce the burden of systemic debt service and repayment;

2) the dollar, because dollar-denominated financial markets are broader and deeper than any other market and because the Fed is years ahead of other major central banks when it comes to normalizing policy and maintaining bank solvency (i.e., other fiats are in worse shape), and;

3) Bitcoin, the borderless digital currency that is already being perceived as a better store of value than gold and all fiat currencies, and potentially a more expedient means of exchange too. All three should win in different ways.

It may be easier to accept this discussion by first reminding one’s self that monetary regimes come and go every fifty years or so. The last transition was in 1971 and the world is due for another. We have a high level of conviction that the evanescence of the current global monetary system is rooted in sound economics and already has been firmly established. A global monetary reset is necessary and likely.

To understand why we must break down money into its two main components: a means of exchange and a store of value. When it comes to using money in exchange for goods and services, fiat currencies have it all over gold and crypto currencies presently. That’s because governments demand taxes be paid with their fiat currencies (legal tender), forcing producers and labor to demand compensation in those currencies. As a result, banking, payment systems and all goods and service channels are set up to use fiat-sponsored currencies.

When it comes to a store of value, however, the factors of production may choose to save in whatever form of money they want. If the general perception is that government-sponsored, bank system-created fiat currencies will have to be greatly diluted in the future so that systemic debts can be serviced and repaid, then savers will migrate to money forms with capped floats, like gold and Bitcoin.
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Merkel: Europe must fight for its own future, not rely on U.S., U.K.

German Chancellor Angela Merkel warned Sunday that Europe could no longer completely depend on the U.S. and the U.K., and that the European Union must make its own destiny.

“The times in which we can fully count on others are somewhat over, as I have experienced in the past few days. . . . we Europeans must really take our destiny into our own hands.”
Angela Merkel

Speaking at a campaign event in Munich, Merkel did not specifically mention President Donald Trump, Brexit or the recently concluded G-7 summit, but implied that geopolitical divisions are testing longtime alliances.

Merkel said it was important to remain on friendly terms with the U.S., the U.K. and Russia “wherever that is possible,” but that “we need to know we must fight for our own future, as Europeans, for our destiny.”

Merkel expressed frustration after the G-7 meetings, particularly on the issue of climate change, saying Saturday that talks were “very unsatisfactory.” Trump has threatened to pull the U.S. out of the Paris climate accord to reduce global carbon emissions, and said he will make a decision on it this week. Trump also told NATO allies to increase military spending, and railed against Germany’s “very bad” trade surplus with the U.S.

Hedge Funds Pile Into Gold At Fastest Pace Since 2007

Hedge funds are jumping back into gold.

Money managers boosted their long positions in U.S. futures by the most in almost a decade in the week ended May 23, Commodity Futures Trading Commission data show.
As Bloomberg notes, bullion futures have posted three straight weekly gains, helped by U.S. and European political angst that has boosted demand for the metal as a haven.

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Here Are The Best FX Value Trades To Play Now

Long CAD vs USD and AUD offer the best relative value trades to play around current levels, argues TD Research.

"The baseline for thinking about relative value trades is to buy currencies that are both cheap and have momentum versus ones that are rich and are retreating. We note the USD profile probably helps to explain some of the recent weakness. It is also the most expensive.

Notably, CAD and JPY both fare well on our measures of growth and value. Indeed, CAD scores well on both measures, increasing our confidence in our call for a push back to 1.32.

We also think the ranking model favors fading rallies in AUDCAD since AUD has recently seen the sharpest downgrade in growth momentum," TD notes.

In line with this view, TD maintains a short USD/CAD* from 1.37 targeting a move to 1.32.

Source: TD Securities Research

Deutsche Bank is making a big bet on the future of finance

Deutsche Bank is making a big bet on financial technology.

The German bank is investing in fintech startups. It just opened a fourth innovation lab, this time in the financial district in New York. A chunk of its website is dedicated to digital banking.

Now it's making a push to advise financial technology companies, too.

The German bank has hired Tommaso Zanobini as its global head of financial technology, based in New York. He was most recently the global head of financial technology and services at Jefferies, and he was previously the global head of technology services at Barclays.

The fintech group at Deutsche Bank is a joint venture between the financial institutions group and the tech, media, and telecoms group, and Zanobini will report to financial institutions specialist Celeste Guth and tech banker Mark Keene. In his new role, he will work with Rahul Singla, the Americas financial technology head, and Vipin Chhajer, the European head.
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The Australian Dollar Forecast to Fall as Carry Advantage Declines

The Australian Dollar is predicted to weaken over the next year-and-a-half as commodity deflation, an under-employed work-force, high levels of debt and unprofitable banks weigh on the outlook.

These are the views of Morgan Stanley who have released a mid-year update concerning the outlook for AUD.

Australia’s main export is Iron Ore but the outlook is not rosy for the commodity as its main market is China which is slowing down.

Not only are stockpiles still high after a restocking drive when prices were low in 2016, but the government is changing its broader economic strategy away from heavy industry to focus on increasing the services sector.

Regarding the labour market, looks can be deceptive says Morgan Stanley.

“Although unemployment recently ticked down, a more holistic view of the labour market paints a weaker picture, with underemployment and participation both showing weakness. At the same time, domestic inflationary pressures remain weak, in particular on the wage side,” said the bank’s chief analyst Hans Redeker.

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Pound Sterling's Potential Ranges v Euro and Dollar on Election Night

The British Pound was seen oscillating within familiar ranges against the Euro on what should be a pivotal day for the Pound and the Euro.

The first key test passed with relatively little damage being inflicted on either currency - the European Central Bank gave guidance as to future interest rate policy but no surprises were forthcoming.

The big moves should come when the election results are released and we have been hearing from the best and brightest in the world of FX research on where Sterling might go.

At present, expectations are for the Conservatives to expand their majority in parliament.

Yesterday the battle appeared to be a two horse race, as Jeremy Corbyn’s odds to be the new Prime Minister were as short as 3/1 according to Oddschecker.

Contrast that to this morning and he’s already drifted to 11/2. The Conservative party, on the other hand, appear to have it all wrapped up; the odds of them winning the most seats is as short as 1/33 with some firms, implying a 97.1% chance of winning report Oddschecker.

To help calibrate expectations, we have been bringing the views of the foreign exchange analyst community.

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EUR: Focus Shifts To French Parliamentary Elections Next Week; What's The Trade?

This week's ECB meeting was a non-event for the EUR and focus now shifts to the French Parliamentary elections next week.

"Investors went into the meeting with a relatively light position in our view, looking for an opportunity to buy any EUR dip. We have to wait for this fall to get the details on the future of QE after this year.

Polls suggest an easy win with absolute majority for President Macron in the Parliamentary elections in France next week. Such a victory would give more political capital to Macron, helping him to reform France and argue for broader Eurozone reforms post-QE with the winner of the German elections this fall. On balance, positive for the EUR"

All in all, expect a mixed outlook for EUR/USD, but recommends long EUR/GBP and is looking for the right opportunity to go long EUR/JPY.

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Buy GBP/USD say ING: Pound Sterling Oversold and a Softer Brexit Beckons

Analysts at ING Bank N.V. react to recent moves in foreign exchange markets in response to the UK General Election by Pound Sterling has been punished too severely.

The Conservative Party have lost their working majority in the lower house of the UK parliament which has opened the door to significant political uncertainty and the Pound has responded by falling.

However, with an eye on the next steps the currency might take is analyst Viraj Patel at ING, who says now could be the time to prepare for a recovery.

Patel tells clients that, “history may show that one of the lasting effects of the 2017 General Election hung parliament result was a paradigm-shifting change in the UK’s Brexit stance.”

Latest news reports suggest Theresa May will seek to govern a minority government with the support of Northern Ireland's DUP.

For Patel, the Pound Sterling’s outlook rests with the nature of the Brexit deal that will emerge over the next two years and recent shifts suggest the party's previous plans with regards to Brexit will have to be reconsidered.

“It may be way too early to conclude this with any certainty right now, but the loss of Conservative seats – and rise in Labour foothold – suggests that the dial within the UK parliament may tilt towards a ‘softer’ core Brexit view, with some ‘hard’ Brexit pushback,” says Patel.

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Germany Really Is the Backbone of Europe, Swiss Study Finds

Contrary to criticism that Germany’s trade surplus undermines Europe, a recent Swiss study shows that the German economy the source of millions of jobs in neighboring countries.

In a study commissioned by the Bavarian Industry Association (VBW), the Basel-based Prognos consultancy found that the German economy secures 4.8 million jobs in other European countries.

“Our study rebuts the fable that German economic competitiveness is damaging to its neighbors,” VBW head Bertram Brossardt said in a statement.

The study was commissioned by VBW to dispel criticism that Germany’s export competitiveness is harmful to Europe. The study found that Germany’s immediate neighbors – the Netherlands, France and Belgium – profit the most from German demand.

Germany is Europe’s largest economy, accounting for roughly one-third of the Eurozone’s gross domestic product (GDP).

Strength in exports and investments drove Germany to first-quarter growth of 0.6%, the Federal Statistics Office revealed last month. Earlier this month, euro area growth was revised up to 0.5% in the first quarter, the strongest in two years.

U.S. President Donald Trump has criticized Germany for exploiting the euro in its trade dealings, claiming that Berlin uses a “grossly undervalued” currency to create an unfair advantage.

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