I have been a conspicuous bear on the euro (FXE) all year, back when it was trading at $1.45 (click here for the call).
We have now hit my target of the low $1.20’s, and the really easy money has been made. Overshoot territory now beckons. It seems the entire world, having passionately loved the European currency only six months ago, now despises it like a cheating boyfriend.
There is nothing worse than a trader scorned. Not a day goes by without hearing about emerging market central banks dumping euro reserves, panic buying of gold coins in Germany, learned university professors explaining why the EC was too big to ever work, or France threatening to pull out imminently. Even the esteemed Economist magazine, my former employer, has its “Big Mac” index of purchasing power parity for the euro at 1:1 against Uncle Buck.
A trillion dollar bailout measure came and went, like yesterday’s newspapers. At this stage I think the prudent trader will start tightening up his stops on short Euro positions. The risk of a snap back is growing by the day. Europe is increasingly desperate to get the crisis under control, and eventually they will succeed. When cornered, never underestimate a government’s ability to change the rules.
I have seen this happen dozens of times over the last four decades. Capital controls can’t be far off. The scary thing is, as Ian Bremmer pointed out in his interview on Hedge Fund Radio a few days ago, (click here for the full show), this could take five years to play out. In the meantime, I’m going to hire Gisele Bündchen as my head currency trader.She is the super model who demanded to be paid in Euros when it hit $1.60. I’ll simply take her advice and run like hell to do the opposite in the market. And who knows? She may have some free time after work.