While the bond markets in Europe wobble under nervous Greek-inspired sentiment, and now ‘reflation concerns’, who would have thought that the Euro would appreciate? Surely selling Euro bonds means selling the currency too?
My suspicion is the position unwinds taking place are the ‘fully hedged variety’, while the purchases are Euro long. The fully hedged trade is to buy, say, Spain and sell the currency exposure. This requires three transactions – a bond purchase, a spot EUR purchase and a forward EUR sale, where the last two trades roughly balance off. The EUR long trade has just two components – the bond purchase and the spot EUR purchase. It seems that the currency imbalance is reflecting this switch from investors who were hedged to those who are unhedged.
Who could they be? Central Banks and Sovereign Reserves Managers are traditionally unhedged. Hedge funds and relative value investors tend to go fully-hedged. My guess is that Central Banks are buying the bonds that the Hedge Funds are selling in Europe, driving up the Euro. Longer term, this is good for the European bond market since the new owners are buy-and-hold.
Bonus Uber Footnote
In Singapore, a taxi company charges drivers SGD 125 per day for a standard taxi and SGD 175 for a Mercedes. My Uber driver confided that he was paying SGD 60 to rent his car from an Uber operator, but now leases directly from a car hire company on a monthly basis averaging SGD 46 per day. If, like me, you ever wondered about the economics of Uber, now you know.
A driver saves SGD 79 per day on his fixed costs but sacrifices not being available for street jobs. Uber’s role is to attract call jobs by being cheaper than standard taxi booking fees. Simple. I wouldn’t want to be a taxi company.