French Election Thesis Part 2: The End of a Union

11:13 PM

I try not to trade events like these because I do not know or pretend to know outcomes.

Yet now, I find myself trading this.


EU: A Point of collapse

What made me when to trade this was because I believe in the collapse of the EU. It started with rebel economist Prof. Steve Keen who has a great YouTube channel. I was listening to his comments about Brexit and it got me interested.

This was followed up with a trip to the library where I counted: 4 books on why the EU will fail and 1 about the EU as a whole. None on the how it is benefiting the region.

Indeed if the consensus is taken amongst writers and academics, the conclusion is the EU must fail. But like all macro trades, it needs was a timeframe/catalyst to be realized. While not always certain, playing all possible scenarios gives me limited downside with much upside benefit.

Regardless if this call is correct, I will assume the EU will fail if not here, in another condition

Brexit was a blow to the EU, but certainly not the nail-in-the-coffin. Frexit plus Brexit though, this might be good enough.



French Elections: The Underpriced event

As I mentioned in my previous thesis, most of the attention went to Trump and the US. This, however, meant attention was taken away from the France. I expected fear to come back into the market and bring the EUR down. It did. Until Tuesday.

The snap election announcement made me lose half of my initial profits. But I am still profitable up about 70 pips down from close to 200 pips.

But to me, nothing has changed yet. The USD has weakened somewhat, but looking at the index like the DXY or USDOLLAR index is not really a fair comparison given the weightings it has to the GBP and EUR. The USDJPY has weakened, but somewhat less impacted vis-a-vis the other crosses.

The EUR, on the other hand, seems to be strong, and the equivalent Volatility index is low. Meaning, if I am correct, there are increased long positions in the EUR possibly explaining the EUR rally yesterday.

Quandl latest data is showing they are about square as at last print last week but this week's print will be telling.

It is no surprise that speculators are long, given all the guidance given via the big banks

Dinosar Event

I said this on my eToro wall, this is a position whereby, the upside is limited because the market is expecting a Macron victory, while the downside is catastrophic because it means the end of the Euro.

So my conclusion if I were to "read tea leaves" if that the market event is underpriced, most ignoring the downside possibility.

This fallacy in the market is not uncommon, this where normal distribution models who are based themselves historical information fail. A 5% chance that a catastrophic event was to happen is simply ignored due to expert consensus and information.

Is the French elections a 5% probability? I think it is closer to 60%.

More on part 3

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