Positive Euro positioning

Darwinex pivot
First, a word on the Darwinex pivot changing their fee structure from commissions to performance and management fee. Overall I support the change since it allows Darwinex to focus on growing AUM and performance instead of encouraging trading turnover.

What’s good for investors in all 3 Stokes Bay Darwins is that there is plenty of capacity (>$1bn) in each which means there will not be any negative divergence from increasing size of AUM for some time to come!

The future
I very much look forward to having access to Interactive Broker’s range of instruments which will give me more opportunity to express my views on a wider range of macro ideas. Not only will that add to extra returns but also will help me reduce the Darwins’ volatility - theoretically. Fingers crossed this comes in Q3!?

Stokes Bay Darwins
LWE is more focused on the short term and, among other positions, is currently positioned long equities and long EURUSD. Both of which are contra to SBY which only maintains a long term focus.

The long equities position is based purely on riding price momentum and central banks being hamstrung by their own policies; i.e. they must maintain easing else a collapse in asset prices may ensue. Powell will explain the FOMC decision this coming week so expect volatility and possibly a turn in prices if they deviate from their existing rhetoric of doing whatever is necessary to keep markets afloat, sorry, I of course mean ‘facilitating an economic recovery’!

The switch long in EURUSD is more of a fundamental change in view and is also reflected in SKI due to the political nature of the change. SBY remains short.

The ECB is going to have to reach some agreement with the German courts about how the ECB can use its powers across the euro block of nations. I am changing my view here of the value of Christine Lagarde. I had been disappointed by her apparent lack of ideas since replacing Draghi. But now I am of the opinion she is negotiating well behind the scenes toward a solution with Germany. However, this is no given and also she needs to convince all of the ‘frugal four’, as they are dubbed. Lagarde has shown no fear in confronting the issue at hand and seems to be continuing on a plan to unrestricted QE which will at some point require a change in the rules as to how asset purchases may be apportioned amongst EU members.

Whilst this will only fully play out over years, the main drag on the euro is that it has been held down by the uncertainty it cannot survive long term (due to a lack of economic union). A change in the mindset toward an economic and not just political union would create a massive swing in EURUSD to test 1.50 (first test 1.15 then 1.25). Markets will front run this as events develop knowing a lot of funds are positioned short based on an expectation an economic union will never occur and Southern Europe’s financial needs will ultimately break the euro. It is not likely that euro members will want to press the decision quickly since volatility in the euro is of no benefit to them. So, a gradual ‘coming together’ even if it is more ‘optics’ than fundamentals could create its own expectations which drives the currency higher. That may force the ‘frugal four’ to accept change over time since any strong contrary statement will risk a sharp euro collapse. Again, this shows how important politics is in driving economic outcomes. Contrast the ‘soft’ political skills of Lagarde against Trump’s ‘hard’ politics. Let’s see how she does.

EURUSD could even go higher with USD weakness driven by Trump’s position weakening in 2020 and a Democratic government becoming a greater probability.

If the outlook for economic unity across the euro nations increases, SBY would also change positioning to long accordingly. Currently SBY remains short EURUSD whilst the euro nations remain unaligned.

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