HardAssetsInvestor

Mike Norman, Hard Assets Investor (Norman): Hello everybody, and welcome to HardAssetsInvestor.com. I'm Mike Norman, your host. Well, the FX markets have always had an influence on commodities. And here to talk about the FX outlook, who better than Marc Chandler, chief currency strategist at Brown Brothers Harriman? Marc, thanks for coming back on the show. I haven't seen you in a while. But I see you out there all the time on other various programs.

Let's talk, now, about foreign exchange markets. Obviously, lots going on, especially with Europe. I saw a statistic the other day that something like 40 billion in bets against the euro … in other words, people making bets that the euro would fail. Is this a failed bet? With everything that's gone on, the euro has been pretty resilient, wouldn't you say?

Marc Chandler, chief currency strategist, Brown Brothers Harriman (Chandler): The euro is pretty resilient, still above its fair value, like purchasing power parity. I think that at the IMM, the commitment of traders in the futures market shows the highest number of net to short positions since the middle of last year.

Norman: Well, that's a contrarian indicator, in my book, anyway.

Chandler: Yes, but I think that people can win on that bet, though, if the euro falls or if it breaks up. And I think that they might win on the euro falling further. I think the euro, today [Nov. 29, 2011] is trading around $1.34. And I think that, by the end of the year, we're down below $1.30.

Norman: Really?

Chandler: But I think that the eurozone doesn't break up. I think this is where people are nervous, and rightly so. But I would compare it to the Cuban missile crisis. You've got the Soviet ships coming to the U.S. blockade. And which side blinks first? And I think that, if you blink right now, you miss the real play.

Norman: I agree with you. I do not think the eurozone will break up. And I think we're closer to a resolution, at least in terms of the solvency issue, which has been, really, the crisis thus far. And I think it's a realization that the ECB has to be sort of the quasi-fiscal authority of Europe. There's been resistance to that on the part of Germany. But now I think Germany seems to be acquiescing as long as conditions are put in place. If the ECB is going to do this, they're going to have to enforce more austerity, this sort of thing. Is that how you see it playing out?

Chandler: I think that what happens is that Germany needs to share its balance sheet with the other countries. But they can't just do so blindly, because they're going to have these conditions. I think the conditions have to be threefold. There has to be something that gives Europe a veto over countries' budgets. So they can't just spend willy-nilly like the Greeks did.

Secondly, there has to be some element, some mechanism for surveillance implementation, because there's always implementation risk. Greece says they're going to do X, but even this year, they have a bigger budget deficit than last year. So you need the surveillance to make sure they're implementing properly.

And you also need the stick. You need something to penalize, some kind of automaticity that penalizes countries for violating the agreement. And this is important, because early in the 2000 period, the first countries to violate the stability and growth pact were Germany and France. And they weaseled their way out of being fined. And so, you need some kind of automatic principles in place so there doesn't have to be this political maneuvering.