How to Cash in on the Endless Greek Mess
By Evaldo Albuquerque, Editor
Exotic FX Alert
This week, I’m down in Brazil spending some time with my family.
Around here my friends all know that I work with currencies. So everywhere I go, everyone wants to know my opinion about the dollar.
After all, the Brazilian real has lost a lot of value against the U.S. dollar over the past few days – over 2% in the last week. (In currency terms, that’s a lot.)
In fact, the dollar has rallied against all emerging market currencies. But the Brazilian real was definitely not the worst performer – not by a long shot.
Not surprisingly, some of the worst performing currencies were in Europe…
In Europe, emerging market currencies dropped like a rock over the last week because of the European debt crisis.
In just a moment, I will show how you can short these currencies for a possible double or triple-digit gain next time the euro falls even further.
But first, let me show you why the euro crisis isn’t over.
The Endless Greek Novel
The Greek crisis is an endless mess. It’s always coming back to haunt the markets. The only reason I don’t get tired of it is because it creates some incredible trading opportunities in currencies.
The story is always the same. European authorities keep saying Greece won’t default because it’s taking care of its deficit with austerity measures. But everyone knows Greece is going to default sooner or later.
It’s trapped in a classic debt spiral. More austerity measures will only shrink the economy even more, reducing tax receipts and increasing the deficit. The only way out is a default.
The Greek government is trying to hit fiscal targets based on estimates of negative GDP growth for 2011 of -3.6%. They are dreaming.
The economy already contracted 8.1% in the first quarter and 7.3% in the second quarter. The contraction for the whole year will be much worse than the government estimates.
Greece may be able to secure another IMF disbursement at the end of this month. But it will need more money by December.
The government is already postponing pensions and other benefit payments to public sector workers because of chronic cash shortfalls.
In short, Greece is broke. It’s as simple as that.
I suspect the problems in Greece and other troubled European nations will force the European Central Bank (ECB) to change its interest rate policy.
The ECB Will Cut Rates, Just Like it Did in 2008
The ECB does a horrible job at timing interest rate changes. In July 2008, the ECB raised rates to fight inflation. The global economy back then was also in trouble, but the ECB didn’t care.
What was the result? Once the U.S. housing crisis became a full blown economic meltdown, the ECB had to cut rates. And the euro tumbled.
Once again, the story hasn’t changed.
The ECB has already hiked rates this year. But now it will once again start to cut rates. In fact I warned you this was going to happen back in March. Here’s what I wrote:
“Higher rates will make the life of the PIGS (Portugal, Ireland, Greece, and Spain) a whole lot more complicated. With austerity measures still biting, higher interest rates is the last thing those countries need. Although higher rates will push the euro higher in the short-term, in the long-term, it will come back to bite the troubled nations.”
You can read the whole article here.
It did take a little while for those high rates to hurt the European economies. But it did. And the euro has just started to tumble once again.
Traders in the Forex market can easily profit off that development in the weeks and months to come, as this euro story plays out. Let me show you how.
The Best Way to Short the Euro
For the past four months the euro had been moving in a range, despite all the problems in Europe. I always thought that the euro was going to break lower. When a range is established, the best way to trade it is to short it when the currency reaches the top.
That’s exactly what I did last week. I recommended my Exotic FX Alert traders bet against the euro when it was trading at the top of the range.
But here’s the thing: I didn’t recommend my subscribers short the euro. I recommended they short another European currency that tends to move with the euro.
As I’ve mentioned before, there are four exotic currencies that follow the euro’s path – the Polish zloty, Turkish lira, Hungarian forint, and Czech koruna.
They all can follow the euro’s next moves, only they tend to move much faster.
For instance, the euro has dropped about 600 pips since mid-August. But my Exotic FX Alert subscribers locked in a gain of 1,500 pips (around 160%) by shorting one of these smaller exotic currencies that followed the euro lower over that time.
So as a trader, I urge you to keep an eye on the euro. So far, the euro has recovered somewhat. But I suspect the euro rally won’t last.
When the euro tanks, just shorting these smaller European currencies can hand you some impressive gains.
Best Regards,
Evaldo Albuquerque
Editor, Exotic FX Alert
P.S. This is just one example of the incredible profit opportunities springing up in the Forex market right now. But imagine taking advantage of opportunities like this – up to eight times in a single day. Our latest publication can tell you how. Click here to get started.
