China floating its currency would be a terrible idea, one of the first things to happen would be a massive collective speculative attack against the Yuan, hedge funds would drive it high in the sky for the purpose of wrecking China's export industry! Before back when Bretton Woods was established we had pegged currencies that didn't float so the world economy was far more stable in the 50's-60's than they were in the 70's,80's,90's,00's. Free floating currencies gave the world currency speculative derivative peddling monstrosities such as the Soro's Quantum Fund which was the leading hedge fund that weakened the Euro in favor of the Dollar:
Hedge funds are ganging up on weaker euro
Some heavyweight hedge funds have launched large bearish bets against the euro in moves that are reminiscent of trades at the height of the U.S. financial crisis.
The big bets are emerging amid gatherings such as an exclusive "idea dinner" earlier this month that included hedge-fund titans SAC Capital Advisors LP and Soros Fund Management LLC. During the dinner, hosted by a boutique investment bank at a private townhouse in Manhattan, a small group of all-star hedge-fund managers argued that the euro is likely to fall to "parity"—or equal on an exchange basis—with the dollar.
The currency wagers signal that big financial players spot a rare trading opening driven by broader market dislocations. The euro, which traded at $1.51 in December, now hovers around $1.3550. With traders using leverage—often borrowing 20 times the size of their bet, accentuating gains and losses— a euro move to $1 could represent a career trade.
If investors put up $5 million to make $100 million trade, a 5% price move in the right direction doubles their initial investment.
"This is an opportunity...to make a lot of money," says Hans Hufschmid, a former senior Salomon Brothers executive who now runs GlobeOp Financial Services SA, a hedge-fund administrator in London and New York.
Through small gatherings, hedge funds can discuss similar trades that can feed on each other, in moves similar to those criticized in the Panic of 2008.
Then, big hedge-fund managers, such as Greenlight Capital Inc. President David Einhorn, who also was at this month's euro-dominated dinner, determined that the fortunes of Lehman Brothers Holdings and other financial firms were dim and bet heavily against their securities.
In recent weeks, some traders have compared Greece to Bear Stearns Cos., the first major U.S. investment bank to falter in 2008, and Portugal as the equivalent of Lehman, which flailed for months before collapsing.
There is nothing improper about hedge funds jumping on the same trade—unless it is deemed by regulators to be collusion.
Regulators haven't suggested that any trading has been improper. Still, the euro action shows that such loosely coordinated trading is roiling markets.
An SAC manager, Aaron Cowen, who pitched the group on the bearish bet, said he viewed all possible outcomes relating to the Greek debt crisis as negative for the euro, people familiar with the matter say. SAC's trading position on the euro is unclear. Mr. Cowen declined to comment.
George Soros, head of a $27-billion fund manager, warned publicly last weekend that if the European union doesn't fix its finances, "the euro may fall apart." Through a spokesman for Soros Fund Management, he declined to comment for this article.
A Greek finance ministry official declined to comment. A European Commission spokeswoman said the Commission doesn't comment on market rumors, adding that the European Union's executive arm is working toward developing rules to tighten regulation and risk.
Few traders expect the value of the euro to collapse in the same the way that the British pound did in 1992 amid a large bearish bet by Mr. Soros. In that famous trade, which traders say led to a $1 billion profit, selling led by Mr. Soros pushed the pound's value so low that the Britain was forced to withdraw its currency from Europe's Exchange Rate Mechanism, which tied currencies together within fairly narrow trading bands, which then caused the pound to drop even more sharply.
Traders estimate that bets for and against the euro account for a huge chunk of the daily $3 trillion global currency market; that's a far cry from 1992, when global daily volume was just $820 billion.
As in the U.S. financial crisis in 2008, derivatives known as credit default swaps are playing a part in the trades. Some of the largest hedge funds, including Paulson & Co. Inc., which manages $32 billion, have bought such swaps, which act as insurance against a default by Greece on its sovereign debt. Traders view higher swaps prices as warning signs of potential default.
Since January, the prices of such swaps have nearly doubled, reflecting investors concerns about a default by Greece. Paulson had built a large bearish position on Europe, people familiar with the matter say, including swaps that will pay out if Greece defaults on its debt within five years. But someone familiar with the matter said that more recently, Paulson had become bullish on the euro.
In a statement, Paulson declined to comment "on individual positions," saying it "does not manipulate or seek to destabilize securities in any markets."
Late last year, hedge funds bought swaps that insured the debt of Portugal, Italy, Greece and Spain against the risk of default, and began making bearish euro bets. More recently, the hedge funds have sold these swaps to banks looking to "hedge," or protect, their holdings of European government bonds, traders say.
In the past year, the overall value of swaps insuring default against a Greek debt default has doubled, to $84.8 billion, according to Depository Trust & Clearing Corp. But the net amount that sellers would actually pay in a default rose just modestly over the same period, up only 4% to $8.9 billion, the DTCC says. This suggests that banks and others have bought and sold roughly equal amounts of swaps to hedge their positions, traders say.
The bigger bet against Europe these days is playing out in the vast foreign-exchange markets, which offers a plethora of ways to trade.
The focus on the euro began on Dec. 4, when the currency swooned 1.5% following an unexpectedly strong slowdown in the pace of U.S. job losses that buoyed the dollar.
Between Dec. 9 and Dec. 11, some big European and U.S. banks made bearish calls on the euro by buying one-year euro "puts." Puts give the holder the right to sell an investment at a specified price by a set date.
The pressure on the euro began building. The currency fell another 1.3% on Dec. 16, when Standard & Poor's downgraded Greek sovereign debt. Around that time, some large investors like asset manager BlackRock Inc. BLK -0.75% had bearish bets on the euro, believing that it couldn't sustain the levels at which it was then trading and that Europe's financial recovery would lag that of the U.S., according to people familiar with their position.
The concerns about Greece heightened on Jan. 20, when investors began to worry that the country would be unable to refinance its heavy debt load, causing the euro to fall another 1.3% to around $1.41. By Jan. 22, the cost to insure $10 million of Greek debt against default had risen to $339,000 from $282,000 on Jan. 1.
That same day, Greece announced it planned a five-year, €8 billion ($10.83 billion) bond sale in the coming days. To stave off speculators, Greece and its investment-bank advisors limited what could be allocated to hedge funds, according to a person familiar with the sale.
The sale was completed Jan. 25. But by Jan. 28, the value of the new bond had fallen 3.5%, which left investors unhappy.
At the Feb. 8 dinner in Manhattan, hosted by Monness, Crespi, Hardt & Co., a boutique research and brokerage firm, three portfolio managers spoke about investment themes related to the European debt crisis.
Donald Morgan, head of hedge-fund Brigade Capital Management LLC, told the group he believed the Greek debt crisis is an early domino to fall in a contagion that eventually will hit states, municipalities and all forms of sovereign debt. Greenlight's Mr. Einhorn, meanwhile, who was among the earliest and most vocal bears on Lehman, said he is bullish on gold because of inflation concerns. Mr. Einhorn declined to comment.
Three days after the dinner, the euro was hit with another wave of selling, triggering a decline that brought the currency below $1.36.
Last week, traders from Goldman, J.P. Morgan Chase JPM -0.34% & Co., Bank of America Corp.'s BAC +0.81% Merrill Lynch unit, and the British bank Barclays BCS -2.98% PLC were helping investors place a particularly bearish bet on the euro, traders say.
The trade involved an inexpensive put option that will provide its holder a big payoff if the euro falls to the level of a single U.S. dollar within a year. Known as a "tail-risk" trade because its probability is low, the euro-dollar parity put is a cheap way of ensuring that if the euro sinks dramatically within a year, an investor will generate big returns.
In recent days, the parity trade has been shopped around to banks to see which would offer the best deal. A going price for the extremely cheap bet is around 7% of the amount that a parity-trade would pay off. So for an investor seeking a $1 million bet, the cost is a mere $70,000.
This means that the market currently assigns roughly 14-to-1 odds that parity will be reached. In November, the odds were around 33-to-1, said a person who has seen the pricing for the trade.
...Collective speculative currency attacks wouldn't be possible without destroying the Bretton Woods currency pegging system, and massive deregulation of the Securities/Derivatives market, one in particular measure that comes to mind being the repeal of Glass/Steagal law by Bill Clinton. I do agree that Russia should peg it's currency with the Yuan, but not the Euro.