By Martin Tillier
First, a disclaimer. I am English. Our decision not to join the Euro in 1999 is looking better every day. The urge to run around continental Europe shouting “Nah, nah. Told you so…” is almost overwhelming. The mean, the vindictive part of me says a collapse will serve them right for all of that economic success while we were struggling through the 60s and 70s on our damp little island. The only problem is, I don’t think it will happen.
Many people in my adopted home here in the U.S. seem to underestimate the political will it took to establish the union in the first place, and the level of commitment there still is to the idea. For politicians, a legacy of establishing, or rescuing, an idea that ended thousands of years of Europeans killing each other is a powerful motivation. I think they will somehow find a way out.
The instincts of a trader are ingrained in me, so my next question is, how do I profit from this view?
A look at the two year chart shows we are hardly in uncharted territory. It would seem there is still plenty of room to the downside, given the stream of bad news. Indeed, this chart can be looked at as a giant head and shoulders, about to collapse. The problem is, who is left to sell? Nearly twenty years in the foreign exchange market taught me that what matters most is everybody else’s position, not lines on charts. The drawn out nature of the Euro crisis means that there has been ample opportunity for those long the Euro to cut and those that wanted to go short to establish a position. Absent a complete collapse it seems likely that short covering and opportunistic contrarian buyers will lead to a bounce, or at least a limited downside. The more the big players rumble about downside risk the less I would be inclined to short the pair. I am not so much a conspiracy theorist as experienced in FX, the ultimate “sell the rumor, buy the fact” market.
A word of warning, however, long term contrarian plays like this can be expensive in the short term. For every Paulson of 2007 there is an MF Global of 2012. Small initial positions are the way to go. They can always be added to later if an upward trend develops, and allow more flexibility to ride out another push down.
You are free to agree or disagree with my opinion on the Euro. It could still end tragically, and give me cause to behave like a five year old. Just don’t underestimate the desire to make it work. Merkel and the German electorate can talk as tough as they want, but avoiding a return to two millennia of death and destruction is a pretty powerful reason to find a solution.