Why You Should Avoid the Euro
Six months ago, I was visiting with my hedge fund manager friend at his office. As always, he wanted to hear my thoughts on currencies.
What I had to say shocked him.
I told him right now there’s a currency in the market that’s a hundred times riskier than just sitting back and holding U.S. dollars.
He agrees with me that the dollar is pretty much trash over the long haul, so I definitely had his attention…
I told him there was a huge correction coming in this currency that would make even the dollar soar by comparison for months on end.
“What is it?” he asked.
I then told him the same thing I had told CNBC in June. “It’s the euro.”
Of course, at the time, no one was ready for the euro to fall like it has. Even today, no one can see what’s coming for the one currency that’s even worse than the dollar this year.
The Most Miserable Currency of This Year
This may sound obvious now, since the euro has tumbled alongside the many false plans to fix the sovereign debt crisis this year. But when I was speaking to my friend (and interviewing on CNBC), the euro EUR/USD was trading in the 1.43-1.45 range.
Now it’s at 1.35. That means it’s crashed over 800 pips since then. In currency terms, that’s huge drop.
(By the way, I also told you about this coming euro correction on my blog here for Sovereign Investor.)
It means the ailing dollar has soared against the euro since June. You know it’s bad when the red-headed stepchild, the dollar, is gaining against your currency.
From Crisis to Contagion…
In June, we were still seeing the Greek riots happening every day. However, today, the crisis has grown into a full-blown contagion.
It was bad when Greek debt was crashing and their rates were going through the roof. Many banks held Greek debt and had to take significant haircuts as a result.
But that’s nothing compared to what is going on right now.
Right now, the contagion is spreading into Italy. Here’s why that’s important:
- It’s the Eurozone’s 3rd largest country and the 8th biggest in the world. So it has a much deeper impact economically.
- But more banks in Europe and here in America own Italian debt than Greek debt.
American banks own at least $45 billion worth of European debt like Italian and Spanish bonds. It’s the “big name” banks too: Bank of America, JP Morgan Chase, Wells Fargo, Citigroup, Goldman Sachs, Morgan Stanley, etc.
That means this EU debt crisis can wash up on our shores. In fact, it already did last week when MF Global filed for bankruptcy.
The Euro’s Problems Are Suddenly Our Problems
If the Greek debt situation caused MF Global to go bankrupt, I wonder what the “fallout” will be for banks that own Italian debt?
Oh it probably won’t bring down these banks, but it will hurt their asset levels. It will also hurt their earnings as they take some huge haircuts (aka “losses”) in their European bond portfolio holdings.
This will all drive down financial stocks here in the U.S. – and that will lead our stock market even lower. (I’ve mentioned before how bank stocks tend to lead the market lower – this is just one more example of that.)
All of this news is bad for the euro and (temporarily) good for the buck.
As European sentiment grows worse and stocks in Europe and the U.S. head lower, money will continue to flow away from the euro and back to the dollar for now.
In fact, it really hasn’t been all that long since EUR/USD broke its uptrend. So this new “downtrend” has much further room to go. Check it out below.
This Chart Pattern Says that The Euro Has Much Further To Sink Near-Term…Down into the Low 1.30s At Least.
Please click here to view larger image
How far could it all go? Well, when we zoom in on the hourly chart of EUR/USD we can see a chart pattern called a “Bearish Flag” pattern. This looks like an upside down flag on the chart.
Right now, this charting pattern is saying the minimum price target for the euro is 1.31 or 1.32 – at least. So from a technical standpoint, you can see there’s a great reason to short euros at this stage in the game.
The “Euro Road” is Filled With the Most Potholes
Even from a fundamental perspective, the euro carries the most potholes. It continues to make large institutions shy away from owning the euro.
Who can blame them? Right now EU leaders are resigning because the economic situation is so bad. The Greek Prime Minister already resigned and it looks like the Italian Prime Minister will be next.
I’ve been saying for months now that eventually the smaller countries will have to exit the euro. When that happens, the euro will only have room for the larger countries like Germany and France.
Germany and France are the economic powerhouses of the Eurozone. They’re going to eventually get sick and tired of carrying the smaller, debt-ridden economies. Something has to give…and as the contagion gets worse, they may make these changes sooner rather than later.
Right now, the euro is the most miserable currency by far. So whatever you do…avoid the euro like the plague for now. There may be a time to own it in the future…that day is just not today.
Have a Nice Day!
Editor, Currency Cross Trader
P.S. With the euro tumbling, my buddy Evaldo is cleaning up in the exotic currency market. In case you don’t know, Evaldo only recommends currencies from the small emerging markets to his Exotic FX Alert subscribers. In Europe, that means trading currencies like the Polish zloty, Hungarian forint, Czech koruna, and Turkish lira. All four of these currencies tend to follow the euro lower – and all four offer some massive trading opportunities if you know how to time them right. For a look at how to play these exotic currencies yourself, click here.